IG Markets - Afternoon thoughts

IG Markets - Afternoon thoughts

FTSE 5450 -16
DAX 6435 -17
CAC 3047 -11

DOW 12740 +45
NAS 2595 +5
S&P 1341 +3

Oil 94.65
Gold 1555

Across Asia, markets have reversed the gains they posted yesterday as they caught up to the losses posted in European and US markets. Although we didn’t have many fresh leads from European and US trade, investors were in a risk off mood, as Europe’s woes continued to weigh on markets. Market participants continued to react negatively to the political deadlock in Greece where Syriza, the biggest anti-bailout party, refused to form a coalition government. This leaves Europe facing the prospect of a Greek exit. Also weighing on sentiment was news that Angela Merkel’s Christian Democratic Union party suffered a major setback after losing a key state. As a result, we saw money flow out of risk currencies, commodities and equities, with safe haven flows the preferred strategy.

Although Asian markets reacted positively to the China RRR news yesterday, it is clear that the rest of the world is looking at the situation differently, with markets aggressively pricing in a messy end to the Greek dramas. As a result, Asian markets have given up ground today with the Nikkei down 1.2% and the ASX200 dropping 0.7%. In China, the Hang Seng is a touch lower, while the Shanghai Composite has slumped 0.8%. European markets are pointing towards a weaker open, extending the losses seen in yesterday’s session. However, US markets are showing some stability and futures are actually pointing to mild gains at the open. With the S&P 500 falling eight out of the last nine days, and the dollar index (DXY) gaining for a record eleventh day in a row, it seems the bears may want to see fresh news before adding to existing positions, while the bulls will probably want to see how things stabilise before dipping their toes in.

European GDP is expected to contract 0.2%, effectively taking the region into a technical recession after last quarter’s 0.3% contraction. This is sure to get the headlines, despite GDP being a lagging indicator given the world is ever sceptical of global growth, especially in Europe where the implications of tough austerity have yet to run its full course. Newly appointed French President Mr Hollande is scheduled to meet Angela Merkel for the first time, and traders will not only be keen to breakdown their dialogue, but their body language will be highly scrutinised given the break-up of the cosy ‘Merkozy’ relationship. One suspect’s that despite the firm stance expected from Mr Hollande in pushing for growth initiatives, it will be smiles all-round. Greece, as always is front and centre, and while the market pays close attention to any slim possibility, the President can pull off an eleventh hour reprieve and form a coalition, many will be keen to hear more on the €436 million principal repayment on a floating rate note held under UK law, therefore not subject to the recent debt swap agreement. Greece has not decided whether it will or will not pay out, and a failure to pay today would go some way in seeing the country enter a default after an extended thirty day grace period.

It is not all about Europe though, the US economy will have its chance to show its underperforming peers how it’s done when it releases retail sales (expected to gain 0.1%) and empire manufacturing (expected to improve to a reading of 9). With US seven-year treasury yields matching record lows, and the all-important ten-year seven basis points from hitting the September lows, some solid data in manufacturing and consumer spending would cause sellers to emerge and subsequently bring much needed relief to risk assets, notably WTI, which is trading at 2012 lows and now 3% below the 200-day moving average.

The Aussie market has tested some significant support levels today and is trading at its lowest level since April 12 this year. We can’t help but sense that a break below this level would open up the potential for a steep fall. Once again, we saw a rotation from the cyclical plays, particularly the resources, and into the defensive sectors and high yielding stocks. Telstra just blew the rest of the market away, surging 2.9% after breaking above its previous high of $3.67. The stock is benefitting from its defensive nature and high yield. It now also seems like the traders are piling in to take advantage of the impressive price action. The next key resistance for the stock is at $4. Other sectors trading in positive territory are the utilities and consumer staples. Resources have been absolutely hammered with energy and materials sectors leading the declines. Fortescue Metals has been one of the worst performers today, dropping a whopping 5.5%.
www.igmarkets.com.au

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