IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

FTSE 5379 -59
DAX 6353 -48
CAC 3018 -21

DOW 12605 -27
NAS 2574 -7
S&P 1329 -2

Oil 92.68
Gold 1536

Across Asia, markets have extended their losses as risk aversion escalates after Greece failed to form a government, putting fresh elections and a potential euro exit on the cards. In US trade, markets extended their losses after having traded in positive territory early in the session. Positive US and eurozone economic data had lifted sentiment early, but this did not last long as Greece once again dampened investor appetite. News that Greece is set for elections again in June after the President failed in his efforts to convince the key political parties to forge an alliance saw US markets fall sharply into the close.

The negative momentum seen in US markets into the close has been amplified in the Asian session, with some steep losses across the boards. Sharp falls in resource stocks have been a major drag on the Aussie market, which is down over 2%. Elsewhere in the region, the Hang Seng has dropped 2.5%, the Nikkei has declined 1.3% and the Shanghai Composite has shed 0.5%. With deepening concerns over the region, European markets are facing a weaker open. After having been sold off sharply into the close, US markets are facing mild falls at the open. There is quite a lot of data due out in Europe and the US later today. In Europe, we have CPI and trade balance figures as well as a German bond auction. Over in the US, we have building permits, housing starts, industrial production and FOMC meeting minutes.

After a two-hour meeting of five party leaders which yielded no breakthroughs in forming a new government in Greece, it has become apparent that Greece will be heading back to the polls. What is even more concerning is the clear lack of any middle ground among the various parties, which is not the right mode to head to elections in. Party leaders will convene again later today to form a caretaker government that will oversee the election, which will probably take place on June 17. Should this date prove to be accurate, elections would coincide with a potential drying up of Greek finances. What is even more concerning is that Syriza boasts the strongest support in public opinion polls and is showing no signs of softening its opposition to the current bailout agreement. As a result, the euro continued its slide and not even the better-than-expected German Q1 GDP print (0.5% q/q) and the fact that Greece met the €0.4 billion foreign-law bond redemption was enough to stabilise it. Elsewhere in Europe, new French President Hollande appointed German speaking Marc Ayrault as his Prime Minister, a move which many analysts feel is positive.

Many investors would have been caught out by the move seen in the local market today. The index plunged through 4200 and went on to print a low of 4168. Once again, the resources completely collapsed with the big miners down over 3%. Today’s move presents investors with a world of opportunities, with plenty of good quality stocks available at subdued prices. There is still a lot of value in the market and this crisis will pass just like many we have seen in the past. After the recent negative run, we are bound to see a turnaround soon enough and the prospect of picking up stocks like BHP Billiton, Fortescue Metals and Rio Tinto at these levels should not be overlooked. Almost forgotten amid the Greek drama was a reasonably solid batch of US data. The 0.4% month-on-month rise in April US retail sales excluding autos, gasoline and building materials is consistent with real consumer spending beginning Q2, at an annual rate above 2% including services. Above-consensus results were also chalked up for the Empire State manufacturing index (to 17.1 in May from 6.6 in April) and the housing market index (to 29 in May from 24 in April). This bodes well for locally-listed companies with US exposure like James Hardie and Brambles.

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