IG Markets - Afternoon thoughts July 2

Across Asia, regional markets are mostly firmer, but have failed to rally with the same enthusiasm as European and US markets following the EU leaders’ announcement of a set of initiatives designed to bring stability to the European banking system. The Nikkei, the Kospi and the Shanghai Composite are all higher by approximately 0.2%. The Hang Seng is closed for a holiday.
In Australia, the ASX 200 is currently 1.2% higher at 4145 on relatively broad-based gains. Given the relative weakness in the USD, and the resulting strength across the crude and base metal complex, it is not surprising to see the energy and materials sectors as two of the main pace-setters today. Elsewhere, the heavyweight financial and industrial sectors are also seeing healthy percentage gains, while healthcare and utilities are the only two sectors in negative territory.

While it was nice to see a positive response to some of the EU summits’ announced initiatives, it wasn’t long before discussion turned to whether this rally would fade and merely provide an elevated exit point for traders and investors. At the end of the day, while the announced initiatives will go some way to stabilising the European region’s financial system, it doesn’t address the bigger and more pressing problem – returning Europe to a sustainable growth trajectory.

The activation of sovereign bond purchases and the implementation of the ECB in its intended supervisory role will be a long-term process and is still subject to many yet-to-be-finalised details, so the market’s reaction to the news might therefore have been a bit over the top and slightly premature. This notion has played out somewhat in Asian trade, with regional markets (with the exception of the ASX 200) having relatively muted responses to the European/US rallies and risk currencies falling well off their earlier highs.

Over the next few days we will learn a lot about the global markets’ psychology, in particular that of the central banks who essentially control the ‘sentiment’ levers. Over the course of the next few days we have decisions from the RBA, the ECB and the BoE, the latter two of which are expected to recommence easing initiatives. The decisions by these central banks and the reaction from global investors will dictate whether Friday was the start of a meaningful move higher or yet another rally that will ultimately be sold into and eventually fade.
www.igmarkets.com.au

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