IG Markets: Afternoon Thoughts

IG Markets: Afternoon Thoughts

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Oil 84.93

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Across Asia, markets are mostly higher on growing optimism that the Fed will conduct some easing to help the US economy stay on the recovery path. QE3 is right in the cross hairs of markets right now, and Fed watcher Hilsenrath released an article in early Asian trade titled ‘Fed considers more action amid new recovery doubt’, which has been widely discussed on trading floors. This occurred while Fed member Charles Evans hit the market with some ultra-dovish comments which should feed into the QE3 argument, but then his view on the economy is widely known, so did we really learn anything new? There is going to be a raft of Fed speakers this week giving their view on policy in the wake of the poor payrolls report, culminating in Dr Bernanke speaking on Friday, and it has now become almost consensus that he will provide an indication that the Fed will embark on renewed mortgage-backed securities and treasury buying at the June 19 to 20 meeting.

Taking a closer look at regional markets, Japan’s Nikkei has risen 1.6% and is outperforming the region. The Nikkei is being supported by a weaker yen after Finance Minister Azumi noted concerns about the impact of the stronger yen and softer equities on the economy. Hong Kong’s Hang Seng has climbed 1.2%, while the Shanghai Composite is a touch lower. The ASX 200 (+0.2%) has had a choppy session, switching from positive to negative before turning positive again. The FTSE resumes trading after the Jubilee celebrations, and despite a barrage of headline noise released over the last few days, we expect the market to open with a 0.6% gain. The rest of European markets look set to open on the front foot, with mild outperformance seen in the DAX, although one questions how big a reaction there will be to Moody’s downgrading six German banks.

The ECB meeting will be the main event today, with European GDP, German industrial production and UK construction PMI also being released. The consensus is for the Central Bank to keep the benchmark rate unchanged, however given the low inflation and growth profile, you could easily put a case together for them joining the RBA and Danish Central Bank in cutting 25 basis points (bp) or even 50 bp. There are of course other measures the ECB can deliver, for example offering a new round of LTRO (made even more compelling given the flattening of the Spanish yield curve), or cutting the 1% rate charge for taking out loans from the Bank. However, perhaps it will look to keep its powder dry until more is known from both the Greek elections and then any subsequent policy response from governments, something that the ECB is keen to promote.

The highlight for the local market today was the GDP data which surprised to the upside, resulting in a big move higher for the Aussie dollar. Australia's first-quarter GDP released this morning grew by 1.3% on-quarter, and 4.3% on-year. The news sparked a rally in AUD/USD, which charged to a high of 0.98627 this morning. This strong move in the AUD has capped gains in equities today as the industrials struggled. Financials have also had a tough session, with all the big four banks losing ground. Westpac has been the hardest hit, dropping 2%, while NAB has declined 1.6%. Qantas had yet another tough day, dropping over 3%. It is interesting to note that QAN is trading at a discount to its cash backing now. QAN has $3 billion cash on its balance sheet, while its market cap is now around $2.6 billion. As a result, we could see investors use this as a value buying opportunity over the coming sessions. Tomorrow is another big day for the Aussie dollar, with jobs numbers on the calendar. The unemployment rate is expected to rise to 5.2% (from 4.9%), with 900 jobs added. Many continue to feel recent jobs figures did not quite reflect the real situation in the jobs market.

Please contact IG Markets if you require market commentary or the latest dealing price.

www.igmarkets.com.au

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