IG Markets - Afternoon thoughts August 21

FTSE 5840 +16
DAX 7042 +8
CAC 3487 +6
IBEX 7475 +5
DOW 13260 -12
NAS 2782 -2
S&P 1417 -1

Oil 97.03
Gold 1622

Across Asia, markets have mostly turned higher despite limited leads from US and European trade. It was a relatively flat start for most of the regional markets, but we have since seen a variation in price action as they are left to their own devices. Risk assets were relatively flat through European and US trade on a day of limited data releases. Despite the relative calm in markets, there was some movement in the euro as it came under selling pressure early in the US session after the ECB refuted the Der Spiegel report that the Central Bank plans to set a cap on sovereign yields. However, the reports were later confirmed by Jorg Asmussen, who is a powerful German member of the ECB’s executive board. The Spanish 10-year yield dropped 16 basis points to 6.2% and the euro squeezed higher, as risk sentiment improved. Additionally on the European front, investors are awaiting further guidance on Greece's bailout terms. The price action in risk currencies has also been mixed in the Asian session. We’ve had a fairly steady euro, while AUD/USD has surged and broken out of its recent range. AUD/USD surged and has printed a high of 1.0488 on the back of the RBA minutes.

The ASX 200 has perhaps been the most interesting index in the region today. It has rallied around 0.7% with the gains accelerating following the RBA minutes and some positive earnings reports. Japan’s Nikkei and Hong Kong’s Hang Seng are both relatively flat, while the Shanghai Composite has risen 0.6%. The PBOC’s move to step up reverse-repurchase operations in order to ease a cash crunch seems to be supporting Chinese equities. European markets are set to open mildly higher, while US markets are pointing to a flat open. Ahead today, we can expect some comments from FOMC member Lockhart who is scheduled to speak.

The Der Spiegel report that the European Central Bank is considering setting a cap on Eurozone sovereign yields is likely to continue being the main point of focus for the euro. Greece is also back on investors' radars, with the German foreign minister, Westerwelle, meeting his Greek counterpart, Avramopoulos, in Berlin on Monday. Westerwelle noted that a decision on extending further aid to Greece will be taken after the Troika's report in September, but rejected the possibility of a ’substantial watering down‘ of Greece's current bailout terms. Avramopoulos noted that his government will soon present its plans to cut budget deficits to meet the fiscal targets. Both leaders refused to comment on whether Greece could get more time to meet its reform targets.

After a flat start, the local market took off, breaking through yesterday’s high to finally reach the 4400 level. This break of psychological resistance at 4400 will be positive for sentiment, and the next level to look out for is around 4450. On the earnings front, Monadelphous Group (MND) was perhaps the main report of the day. The company’s key clients are the likes of BHP Billiton, Rio Tinto, Woodside, Xstrata and Chevron. As a result, it is a real bellwether for the Australian economy. On top of beating expectations with earnings coming in at $137.3 million versus consensus of $130.7 million and a final dividend of 75 cents versus consensus of 58 cents per share, MND had some upbeat comments about the resource sector. MND has announced a record $2.0 billion of new work and contract extensions in the past 12 months, more than double the value of work announced in the preceding two years combined. The company also commented that the macro view on long-term Australian resources demand remains strong and that a deferral and flattening in new project demand may provide some welcome relief to an overheated market. MND shares have climbed over 8% today. This complements well with some of the positive comments from the minutes on the RBA’s view on both housing and investment.

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