IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

Across Asia, markets are mostly firmer after a relatively weaker open as talk of China easing ramps up. Chinese policy has turned more supportive to growth since the release of April data and analysts are expecting infrastructure investment to be most effective in the short run. We saw risk assets start the week on the front foot yesterday, and the momentum just seems to have filtered through to today’s session. Positivity surrounding the Greek polls which showed that the pro-austerity conservatives had the lead seems to be nullifying the negative impact of the Spanish bank crisis. Sentiment is likely to remain subdued due to concerns surrounding the Spanish government's proposed recapitalisation of its banks. We are also possibly seeing some of the shorts being squeezed out of the system. With US markets closed yesterday, we were left to focus on Greece and Spain headlines for leads.

The Aussie market is the top performer in the region today, rising over 1% after reversing a 0.6% drop in early trade. There has been some disappointing economic data in Japan which has weighed on the Nikkei. Its household spending exceeded expectations, but the unemployment rate and retail sales disappointed. The Nikkei is currently flat and lagging the region. Over in China, the Hang Seng is 0.4% higher and the Shanghai Composite has climbed 0.9%. Although sentiment seems to have turned positive, we haven’t seen much of a move in the euro, which continues to trade relatively subdued. European markets are pointing to a modestly higher open, after having been mildly weaker yesterday. US markets will return to trade on a positive note today with futures suggesting gains of around half a percent for the S&P.

Looking ahead to the European session, market participants will continue to monitor Spain’s borrowing costs after they hit record highs on Monday. Spain is now considering using debt to recapitalise banks rather than directly with cash. Investor concern over the currency union and especially its banking sector seems to be a theme which will affect sentiment for a while. Reports that Greek banks had obtained the promised €18 billion in fresh recapitalisation funds and that Greece still has access to a residual cash reserve to help make ends meet in the near future failed to appease investors. Troika still seems far from moving towards a comprehensive solution with only a month to go before the end-June eurozone leaders' summit. Until we get a more comprehensive solution, it is difficult to see there being enough confidence to underpin markets prior to the elections. On the economic front, we have German preliminary CPI and import prices due out.

Today’s resource-based rally seems to suggest there is growing optimism China will act soon to keep the economy on a firm growth path. Bargain hunting in the sector was the order of the day with stocks like Fortescue Metals, Aquarius Platinum, OZ Minerals and Alumina being swept up by investors. These stocks had been heavily sold off over the past few weeks. The mid-cap industrials, mining and energy space certainly seems to be the place to be today as they are outperforming the bigger miners. Big banks have been quite split today with CBA and ANZ rising 2% each, while WBC and NAB have added around 0.5% each. Healthcare stocks are lagging the market today with the sector trading in negative territory. Following today’s sharp reversal, many will be starting to make calls about the market having bottomed. However, we have only had two consecutive positive sessions and this could merely be the calm before the storm. Traders will be looking to sell into strength as resistance levels are tested on the way back up. On the economic front, tomorrow we have retail sales and construction work data due out.
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