IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

FTSE 5854 +15
DAX 7442 +29
CAC 3510 +13
IBEX 8168 +30
DOW 13591 +32
NAS 2851 +7
S&P 1461 +4

Oil 92.17
Gold 1765

Asian markets have been stuck in tight ranges yet again as this period of consolidation persists. Global markets enjoyed a strong run in the aftermath of the QE announcement by the Fed, but this seems to be swiftly dissipating. Many would have thought we would see a prolonged period of US dollar weakness following the QE announcement, but this hasn’t been the case. In fact we have seen the USD recover some ground against the risk currencies lately, and this USD strength has weighed on commodities. Market participants are now focusing on the developments in Europe, plus China growth concerns. As we mentioned yesterday, a clash between Germany and France on a timetable regarding a banking union has reignited concerns about leaders working together to come up with a solution. There are also concerns that Spain is in no hurry to request a bailout, despite the Financial Times article from last week which suggested we could hear something from Spain as early as Thursday. Disappointing German IFO business climate figures also weighed on risk assets and contributed to the bearish tone in risk.

China provided some positive news after its leading indicators gained 1.7% in August, and the July print was revised higher. AUD/USD had made some ground after bouncing off 1.04, but the recovery has stalled near resistance at 1.045. EUR/USD has been relatively flat at around 1.293, while USD/JPY is also relatively unchanged at 77.84. Looking at the equity markets in the region, Japan is mildly higher, while China and Australia are in the red. The Nikkei is up 0.2% with most analysts attributing the outperformance to the fact that it’s the last day to buy most shares and receive a dividend. The ASX 200 has shed 0.3% and the Hang Seng is down 0.1%. The limited moves in Asian equities highlight the caution being exercised by market participants at the moment. Looking ahead to the European session, the major bourses are likely to recuperate some of yesterday’s losses at the open, with gains of around 0.3% to 0.5% expected. US markets are also likely to open mildly higher.

ECB President Mario Draghi will be on the wires later today, and market participants will be hoping he alleviates some of the concerns holding markets back. European officials are once again showing the lack of cohesion we have become accustomed to throughout the life of the crisis. We are seeing clear divides around the potential set-up of a banking supervisory board, leveraging the ESM and an ever-increasing number of differing views about Greece’s future involvement in the EMU project. We are also hearing more calls from Spain to request assistance, however what seems more interesting is the patience the bond market is giving the country right now.

The local market’s performance today has almost mirrored what we saw yesterday, with the major resource names weighing on the index. Materials and energy sectors are the worst performers today, with most of the heavyweights contributing to the losses. Rio Tinto and Newcrest Mining are both around 2% weaker, while BHP Billiton is down 0.9%. Weakness in the commodity markets has persisted, with iron ore being the main culprit, dropping to $103.70. This has weighed on iron ore miners today. The comments by the RBA regarding the banks were quite interesting, and these saw the financials pull back from their early highs. The RBA said subdued credit growth and high funding costs may dampen the profits of the country's lenders, tempting them to take on riskier loans. Once again defensive names have outperformed, with Telstra climbing 0.8% and Resmed rising 2%.

www.igmarkets.com.au

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