IG Markets: Afternoon Thoughts

IG Markets: Afternoon Thoughts

Across Asia, markets are relatively mixed, with the bulls struggling to shrug off some negative leads from US and European economic releases. In US trade, markets were mostly weaker, as global growth concerns intensified following very weak manufacturing PMI data out of the eurozone, plus worse-than-expected US ADP employment data. The euro sold off after the worrisome data prints, as they pointed to weaker economic activity not just in the periphery, but also in Germany. However, we saw a recovery into the close of the US session, perhaps highlighting that US traders are looking less and less at European equity moves.

Asian markets seem directionless given Japan is offline to celebrate Constitution Memorial Day, and will be off tomorrow as well for Greenery Day. It is fair to say though, that caution is warranted ahead of the upcoming event risk. The Aussie market is relatively flat with some solid gains in the financials space, but plenty of weakness seen in resources. Overall, the local market hasn’t done much at all, and has been stuck in a very tight range. Elsewhere in the region, the Shanghai Composite is 0.4% lower and the Hang Seng is down 0.5%.

European markets missed out on most of the rally from US session lows, so they have the benefit of pricing that in on open. S&P futures are up about 0.2% from the close of the European cash market, but our opening calls suggest these bourses could outperform these leads. Ahead today, Spain will be looking to tap the market for around $1.5 billion to $2.5 billion in three- and five-year bonds, while France is looking to raise $6.5 billion in four different issues. As always, keep an eye on the bid-to-cover given average yields achieved in previous auctions were much lower, so it is clear borrowing costs will rise. In the US, ISM services is released and expectations are for a softening in the pace of growth seen (consensus is for 55.3 from 56). US economic growth is predominantly driven by retail spending, so keep an eye on the employment sub-component, as this is widely seen as a good read-through to Friday’s non-farms report.

One of the main themes from US trade is the fact that the USD is being influenced by the markets’ view of potential QE3 on the back of US data outcomes, as opposed to just simply risk on/risk off. The view that as the US data rolls over, we get closer to another round of asset purchases, which is potentially the biggest saving grace of euro, AUD and other risk forex bulls right now and this was seen evidently in the price action, post the US ADP payrolls report. Clearly the sizeable miss to consensus is consistent with some of the low-ball estimates expected for Friday’s non-farm print, and while the two are totally unrelated, it fits in nicely with the higher trend seen in jobless claims. The euro PMI data has been largely discussed, but it is worth highlighting the Italian PMI data, which can really only be described as terrible. While the headline print was significantly below expectations, drilling down, the new orders sub-component dropped the most in three years to 39.2, and is in deep contractionary territory and simply does bode well for future reads. The fact that we saw weak European employment data (the highest since 1997), European PMI and ADP jobs data fail to cause too many ripples in the S&P 500 shows just how resilient US equities are right now, and if you are still bullish stocks, why sell your clients’ holdings when Ben Bernanke will prop up prices if we don’t see a ‘gradual’ recovery?

Looking at the local market, all the focus was on the banks today, as they continue to pump out some impressive earnings. It has been a busy week for the banks with NAB, ANZ and Westpac all posting earnings. As if that wasn’t enough, the RBA’s decision to slash rates by 50 basis points has seen the banks work overtime as pressure mounts on them to pass it on. Westpac’s half-year report was well received after its cash profit convincingly beat consensus. Many analysts had been expecting a relatively flat cash profit from WBC, as the bank looks to settle into its multi-brand strategy. Having outperformed its peers all year, ANZ has finally seen a pullback, despite delivering on earnings. This indicates just how bullish investors were on the stock. Commonwealth Bank was the second of the big banks to pass on part of the rate cut after announcing a 40 basis-point cut to its variable rate today. This will no doubt put pressure on Westpac and ANZ. WBC will announce how much of the cut it will pass on tomorrow, while ANZ is in no rush and will do so next Friday. On the economic front, tomorrow we have the RBA’s quarterly monetary policy statement to look out for. This could result in some big moves for the Aussie dollar.

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