IG Markets: Afternoon Thoughts

IG Markets: Afternoon Thoughts

Across Asia, markets are mostly weaker on the back of China growth concerns and uncertainty over Greece. Reports suggesting that China's major banks may miss their annual loan targets for the first time in seven years amid weak demand have dampened sentiment in Asian trade. It seems investors are looking for any sort of indication of what to expect on the Greece front after Wednesday’s EU Summit produced no hard decisions on any substantive issues. As a result, Italian PM Mario Monti’s comments gave investors a reason to act with a big reversal seen towards the end of US trade. Some analysts feel Monti’s comments were not enough to have triggered the reversal and attribute the move simply to sellers’ fatigue.

Comments from PBOC member Zhou who suggested China will continue to have a prudent monetary policy in 2012, while the domestic economy faces downward pressure have not helped the situation. As highlighted by the drop in the flash manufacturing PMI to 48.7 in May, China is far from immune to any sharp slowdown in eurozone demand. Hong Kong’s Hang Seng is down 0.2%, while the Shanghai Composite is 0.4% lower. Japan’s Nikkei is flat, but remains headed for its longest weekly losing run in 20 years. The ASX 200 had a fairly positive start, but is now down 0.5% as resource stocks struggle. European markets are facing a modestly weaker open as they price in the developments from the US session. US markets are facing a relatively flat open with data light today. German GfK consumer confidence and University of Michigan confidence figures are both expected to be unchanged. It may be a day of position squaring ahead of the Memorial Day holiday, while other traders simply sit on their hands until clarity prevails.

The S&P once again made a nice move into the close, although perhaps not as impressive as Wednesday’s, but on the other side of coin neither was the initial sell-off. The downside was clearly understandable given you could have picked a barrage of negative headlines ranging from poor global economic data, to the recent Greek polls which put Syriza out in front with 30% of the votes, just ahead of New Democracy with 26%. Mario Monti’s comments on Italian TV that the majority of leaders at the EU summit backed eurobonds and that Germany can be persuaded to take a more favourable stance seemed to be the catalyst. However, Monti’s comments that Greece is likely to stay in the EMU and that he thought it was asked to adopt austerity too early are more worthy of note for us, while perhaps we are just really tired of hearing how bad things are and just needed something to uplift. Perhaps we are seeing sellers fatigue in a market devoid of good news. It seems the S&P wants to trade in a range of 1300 to 1325, however looking at the S&P futures (June contract) we feel that if more short covering occurs, then a close above 1344.8 (50% retracement of the May sell-off) could bring some modest belief back to the bulls.

After a fairly good start, it has been yet another disappointing week for the Aussie market. At current levels (4035), the local index is down 0.3% for the week, after having rallied on Monday and Tuesday. Once again, early gains received no buying support and therefore it was inevitable that the market would drift through the session, buckling under its own weight. When trade started off, it seemed like the cyclicals would have a firm session led by the resources, while the defensive sectors were subdued However, the switch in sentiment happened quite quickly with the big miners losing ground. BHP Billiton is down 1.1%, Rio Tinto has lost 0.8% and Fortescue Metals has declined over 3%. When investors start doubting the China growth story, the miners are generally the main victims. Emeco Holdings has been one of the best performers of the day, rising 3.6% after confirming its FY12 operating NPAT guidance of $67 to $70 million. We are seeing some strength in the telecoms and utilities today with Telstra (+0.2%) and APA Group (+1.8%) holding up well.
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