IG Markets - Afternoon thoughts 18/4/12

Across Asia, markets are rallying in response to the gains seen in US and European markets. In US trade, markets rallied after a successful Spanish bond auction which saw yields cool. This saw investors less pessimistic about Europe and lifted risk assets all round. Sentiment was also helped by an upgrade of the global growth outlook by the IMF and a surprisingly strong German ZEW index.

It has been a predominantly ‘risk on’ session with big gains in the cyclical space. After having spent most of the week relatively subdued, risk appetite finally took off today. In Australia, the resources have been the standout performers, with the big miners (BHP Billiton and Rio Tinto) leading the charge following their production reports. The Aussie market has surged around 1.3% today. Japan’s Nikkei has surged 1.9% after the yen resumed its weakness. USD/JPY rallied to a high of 81.4 after the pair broke out of key resistance at 81.20 and is now eyeing the 81.80 level. All eyes are on April 27 BoJ meeting for the next round of easing to weaken the yen and revive prices. Elsewhere in the region, the Hang Seng is 1.2% higher and the Shanghai Composite has risen 1.3%. With no major fresh leads from the Asian session, US and European markets are pointing towards a relatively flat to mildly firmer open.

Investors will be cheering today’s move, but the question is whether or not the buying will continue for the rest of the week. It is hard to believe that all the problems cited about Europe, particularly Spain, have all of a sudden vanished. Although short-dated Spanish debt auctions attracted strong demand (widely expected), traders will be curious to see how Thursday’s longer-dated debt auctions will go. Earnings reports in the US will remain one of the main event risks of the week, with yet another round of key corporate earnings due out. Amex is one of the main ones to look out for whilst we will continue to see a reaction to the IBM results. IBM reported stronger-than-expected EPS and raised its forecast for the year. There is plenty to look out for in Europe, with current account numbers due out. In the UK, we have BOE minutes and jobs numbers to look out for. As a result, it could be a pretty big session for the pound after GBP/USD topped out at around 1.596 yesterday.

The miners continue the production reports tomorrow, with Australia’s third-largest iron ore producer, Fortescue Metals, due to release its March quarter production report. Analysts are expecting similar rhetoric to what we’ve already heard from BHP and RIO. Credit Suisse expects shipments to be at the lower end of guidance due to significant wet weather impact. However, it expects FMG to maintain 55 million tonnes per annum guidance for the year. CS has an Outperform rating on the stock with a $7.80 price target. Materials have been by far the best performers today, with big gains for BHP, RIO and FMG of around 2.5% each. This shows how bullish investors are on the resource story and could go a long way towards alleviating some of the China concerns we’ve heard over the past week or so. It is also quite interesting to note that several analysts have fairly high price targets for the big miners, with some even topping $100 for RIO. The energy sector has also had a fairly solid say on the back of a big gain for oil in US trade. After having led the market earlier this week, defensives have underperformed today with healthcare, utilities and telecoms at the bottom of the boards today.

ENDS

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