IG Markets: Afternoon Thoughts

IG Markets: Afternoon Thoughts

Across Asia, markets are broadly weaker as Greece’s political situation looks increasingly dire. With New Democracy head Antonis Samaras failing to form a new coalition government, Syriza leader Alexis Tsipras is becoming increasingly vocal. Tsipras stirred things up by warning that ‘the popular verdict clearly renders the bailout deal null’. This Greece political uncertainty has the potential to derail the risk rally we have seen this year. However, US markets bounced off their lows late in the session after fears of a chaotic end-game in Greece were calmed somewhat by comments from Samaras, indicating he would be willing to tolerate a minority government.

The improvement in sentiment into the close of the US session hasn’t done much for the Asian region, as markets have actually extended their losses. The Shanghai Composite has declined 1.4%, while the Hang Seng is 1% lower. Japan’s Nikkei is over 1.5% lower and the ASX 200 has shed 1.1%. European markets are facing mild gains at the open after having missed out on the recovery seen in US trade. However, US markets are facing a much weaker open as European issues persist. Ahead today, we have German and French trade balance figures to look out for. Any rhetoric from Greek leaders will probably be the key event risk driver ahead of the trade balance figures.

The Greek election issues and subsequently the ever-deteriorating relationships between eurozone nations are certainly taking centre stage. US and Chinese growth concerns are still a huge issue, but will probably be underpinned by views that the central banks will act if needed. The recent Greek elections have shown just how divided the nation is in terms of the imposed austerity and ultimately its inclusion in the European Monetary Union (EMU). The massive increase in polls for the extreme right or left parties is a huge talking point, and shows a country that is staring in the face of 24% headline unemployment and 51% youth unemployment. This comes as GDP contracts at a rapid pace, only made worse by the huge spending cuts imposed on Greece in return for the disbursement of the intermittent loan tranches in the second €174 billion bailout. There is a very real threat we will see fresh elections in Greece around June 17 and there is a growing fear among traders that Syriza could poll much better in a second election. An anti-bailout government such as Syriza will simply say ‘no cuts’, the EU/IMF withhold the aid, Greece therefore default on its payment and presumably return to the Drachma and print money.

Today’s price action in the local market shows just how uneasy investors are out there. We do not think today’s selling has had much to do with the federal budget, but rather macro issues facing the eurozone. We are back where we were on April 11, erasing a move higher which was constructed over a three-week period in just four sessions. The move has probably been amplified by the unwinding of positions as stops are hit on the way down. Once again, the resources have been the main source of weakness, with the gold/copper space hit hardest. Newcrest Mining has slumped 5.1% and OZ Minerals has shed 3.5%. Gold and copper dropped around 2% each, with the former breaching the $1600 level. The precious metal is currently trading at around $1591 per ounce and its price action is looking extremely vulnerable. On a positive note, Telstra remains resilient and seems to be the best play in the market right now. The telecom giant has risen 1.4% with its high-yielding nature continuing to attract buying. On the economic front, the rest of this week promises to be quite a spectacle with China trade balance, new loans and M2 money supply data due out. Locally, tomorrow we have jobs numbers due out, with unemployment expected to rise to 5.3% with around 5,000 jobs lost. This is the first time we’ve had a consensus jobs lost in nearly three years.

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