IG Markets - Afternoon thoughts 23/4/12

Across Asia, markets are mostly weaker despite an improvement in China’s HSBC PMI manufacturing reading. China’s manufacturing activity rose from the previous month but was still in contractionary territory at 49.1. The reading suggests that China’s easing measures are beginning to take effect, but further easing is required to keep the recovery on track. This is the first batch of data to be released in what promises to be a big week on the event risk front. Looking at the Chinese markets, the Hang Seng has shed 0.6% and the Shanghai Composite has lost 0.2%.

The Aussie market is around 0.2% lower ahead of tomorrow’s CPI numbers, which will determine whether or not the central bank will cut interest rates in May. The CPI data is widely expected to be weak enough to see the RBA comfortably cut rates. A benign PPI reading today is also supportive of the notion that there will be a negative bias in tomorrow’s CPI reading. Japan’s Nikkei is relatively flat, with USD/JPY still stuck in a relatively tight range. This week yen watchers will focus their attention on Wednesday's FOMC and Friday's BoJ policy decisions. Despite this morning’s slight pullback to 81.34, Fed-BoJ policy divergence is likely to keep the pair at elevated levels and help support the Nikkei. Following the weakness seen in the Asian region, US and European markets are facing mild losses at the open. We are likely to see some cautious trading ahead of French and German manufacturing and services PMI numbers.

Investor attention is likely to focus on whether additional eurozone countries will need external financing and whether the eurozone's own rescue facilities have the means to offer it. The Netherlands will be in focus after budget talks between government coalition members broke down over the weekend. The Netherlands has a triple-A rating from all three major ratings agencies and the budget discussions were aimed at taking the deficit down to below 3% of GDP by 2013. Anlaysts will also continue to monitor the French elections after this weekend’s results. Socialist Party candidate Francois Hollande will face the incumbent president Nicolas Sarkozy in the runoff of France's presidential election on May 6. On Friday, Mr Hollande pressed the ECB to cut interest rates and to lend directly to eurozone member countries to bolster economic activity. France is one of the powerhouses of Europe and has been actively engaged in devising a solution to the debt crisis. Signs of any instability on the France front would be a major event risk. In the US, the FOMC meeting on Wednesday is expected to see little or no change from the tone of the last meeting.

First quarter CPI due tomorrow will be the key Australian data release this week, given the RBA has already signalled it will be a critical input to its policy decision on May 1. UBS expects the headline print to come in at +0.7% q/q and +2.2% y/y (previously +3.1%). It looks for the underlying CPI to slow to only +0.5% q/q, falling to a near decade low of 2.25% y/y. This, it feels, will likely be weak enough for the RBA to deliver a rate cut on May 1. Some already feel a rate cut next month is a done deal and that what will be key is what the big banks do in response to a cut. The Aussie dollar will be firmly in focus ahead of the CPI reading with downside pressure expected should the reading be supportive of a cut. Resources failed to gain any traction at all today and have been the major drag on the local index today. Investors seem to have rushed back to higher yielding stocks with the big banks and telecoms giant Telstra (+0.9%) in favour. Most of the big banks have edged higher with Westpac (+0.5%) leading the way.

ENDS

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