IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

FTSE 5270 -68

DAX 6234 -75

CAC 2982 -30

DOW 12414 -28

NAS 2503 -6

S&P 1300 -5

Oil 92.03

Gold 1573

Across Asia, markets are weaker after picking up some negative leads from European and US markets. In US trade, markets declined yet again on heightened Spain bank concerns and some disappointing US economic data. The surprise deterioration in the Philadelphia Fed manufacturing index and unchanged jobless claims numbers fuelled investor concerns about the US economic recovery. Talk of a run on Spanish banks intensified, while Spanish yields rose as high as 6.42%. News that Moody's downgraded 16 Spanish banks after the US close saw the downward spiral intensify.

Japan’s Nikkei has been the worst performer in the region today on the back of a stronger yen. Yen bulls reasserted themselves, with USD/JPY losing its footing in the face of the surprise deterioration in the US economic data. The JPY is currently the currency of choice for nervous investors and USD/JPY dropped to a low of 79.13. As a result, the Nikkei is 2.5% lower today, with the banks and exporters taking a big hit. Elsewhere in the region, the Hang Seng has slumped 2.3%, the ASX 200 has shed 2.4%, and the Shanghai Composite has declined 1.1%. Resource stocks and the financials are the main culprits on the losing end. As a result, European markets are facing a significantly weaker open, while US markets are facing a modestly softer start. In the US, tonight is all about Facebook, and we thoroughly expect a good day’s showing on its first day of trade; one hopes a positive tape will lift spirits, if for no reason than to give traders something other than Greece to think about.

Uncertainty over Greece has resulted in widespread panic selling. The key risk is that if the new elections on June 17 fail to produce a government with a mandate to continue with the EU-IMF programme of fiscal austerity and structural reform, an exit of Greece from the EMU would be probable. A Greek exit would likely result in widespread default on private sector, as well as sovereign euro-denominated obligations. However, there is a slight positive from Greece to consider at the moment. Latest polls suggest the New Democracy party could secure 123 seats, which combined with the PASOK's 41, would produce a comfortable majority. This knocks some of the wind out of Syriza’s sails and would be euro supportive to the extent it suggests greater scope for compromise on the bailout agreement.

It was an absolute bloodbath for the Aussie market this morning, with the index dropping to a low of 4060 before managing a slight recovery. At current levels, around 4054, the local market is down 5.4% for the week, which is a big dent considering where we were just a couple of weeks ago. We started the year at 4069 after closing the previous year at 4057, and therefore we are now effectively in negative territory for the year. This level is right near the lows from December last year and could offer some form of support. With our two biggest sectors, materials and financials, both heavily sold off, the bulls didn’t stand a chance today. However, there were some bright spots with gold miners being the main outperformers of the day, as Newcrest Mining and Medusa Mining climbed around 4% each. Resmed was also among the outperformers today, gaining ground after announcing plans to initiate a quarterly dividend of $0.17 per share in the first quarter of its fiscal 2013.

We had been expecting some sort of consolidation in risk assets given the steep falls of late, and perhaps we are too early (or wrong), but it feels that any bounces will be minimal and traders will be quick to put on new shorts if a move higher eventuates China seemed to be the ‘new news’, which looks to have the market even more on edge. Goldman Sachs has cut its Q2 2012 GDP forecast to 7.9% from 8.5%, given the slowdown in April activity data, while the China Securities Journal suggested the print will be closer to 7.5%. China five-year credit default swaps have blown out twenty basis points this month to 133 basis points, reflecting the overall concern, and we feel this is a key reason why the Aussie is under such pressure today, not to mention comments from CBA that the commodity super cycle could be at an end.

ends

© Scoop Media