IG Markets - Afternoon thoughts June 4

Across Asia, markets have tracked lower on the back of Friday’s sell-off in the US. Sentiment has slumped after growth indicators failed to inspire the markets on Friday. Lead indicators across the US, Europe and Asia are adding to fears of further economic weakness ahead in the global economy. As a result, risk aversion continues to sweep through markets. It is now clear that not all the macro risks are confined to Europe. A sobering statistic is that after the S&P500 recorded its eighth best 1Q ever, it is now on pace to have its fifth worst 2Q since 1957. As we are only at the beginning of June, this shows just how swiftly sentiment has changed.

Taking a closer look at regional markets, Japan’s Nikkei has shed 2.1%, while Hong Kong’s Hang Seng has tanked 2.4%. A stronger yen is weighing on the Nikkei and talk of intervention is ramping up and perhaps keeping some of the yen bears at bay. Japan’s exporters are put under significant pressure when the yen appreciates. Elsewhere in the region, the Shanghai Composite has shed 1.8% and the ASX 200 is down 1.7%. Selling in the region has been heavier in the financials, industrials and resource space. Given the selling has continued through the Asian session, European and US bourses are facing a tough open, with losses of 1% and above expected. UK markets are closed for holidays until Wednesday.

We are in for a big week, with plenty of economic events on the calendar to look out for and lots of policy decisions due out. The ECB decision will have top billing, as the market looks to the Central Bank in search of immediate and precautionary steps to deal with the recent escalation of the debt crisis. There are also some key bond auctions, with Spain’s likely to get centre stage. US Fed Chief Ben Bernanke is testifying on Thursday, and talk of QE3 is likely to ramp up all week. The recent run of disappointing US data is likely to prompt a revision of the economic assessment in the FOMC statement, which may be signalled and/or previewed by Bernanke. Apart from key economic releases, continued uncertainty ahead of the Greek election on June 17 should keep the 'risk off' theme intact to the benefit of the funding currencies

The local market dipped below 4000 today, sending the ASX 200 into negative territory for the year. The next level to watch is 3873.80 which was the low from 25 November last year. At 4000, we are down around 1.3% for the year, which is quite disappointing considering where we were at the beginning of May. At that time, investors were cheering a 50 basis point rate cut by the RBA. Investors are now facing yet another RBA rate decision, and many will be hoping for some action. With weaker global macro data and ailing Australian macro data, the case for a rate cut is definitely valid. Markets are pricing in a 25 basis point rate cut, while some analysts feel there is a chance we could get a 50 basis point rate cut. As a result, the Aussie dollar is in for a big day tomorrow, as we continue to hear varying predictions for rates. Today’s losses have been broad based, with the cyclicals leading the decline. Most of the resource stocks have logged losses of around 3%. There were not many bright spots in the market today, but precious metals deserve a mention as the mi-tier gold stocks jumped on the back of a rally in gold prices. Medusa Mining has sky rocketed 12.7% and Perseus Mining is 7.3% higher. Telecomms are also outperforming, with Telstra tacking on 0.6%.
www.igmarkets.com.au

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