IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

FTSE 5814 -46
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Oil 90.78
Gold 1762

Asian markets have slumped today on the back of the sharp reversal lower seen in US trade. After a fairly positive European session, risk assets finally gave up their grip in US trade as investors focused on comments suggesting QE3 won’t work. Philadelphia Fed President Plosser suggested that QE3 is unlikely to be effective, with the labour market likely to improve only gradually. With markets appearing a bit toppy and investors looking for an excuse to sell after the recent run, it’s not too surprising that this headline resulted in a sell-off. The losses came despite some positive data from the US crossing the wires, including a better-than-expected CB consumer confidence reading and a significant improvement in the Richmond manufacturing index. Over in Europe, ECB President Mario Draghi defended the OMT programme, but the negative tape continued to roll out of Spain.

AUD/USD slipped from around 1.046 down to 1.038. The break below 1.04 has left AUD/USD extremely vulnerable and the pair slipped to a low of 1.03536 early in Asian trade. EUR/USD has held at 1.29 and has been sidelined at that level for most of the Asian morning session. Looking at the equities in the region, Japan’s Nikkei is the worst performer with a 1.9% drop after over 150 Japanese stocks went ex-dividend today. Struggling resource and industrial names are weighing on markets in Australia and China. The ASX 200 is down 0.3% and the Hang Seng has shed 0.8%. European markets are facing losses of around 0.7% to 0.9% at the open as they price in the drop in US markets after the European close. However, US markets could see mild gains after a slight bounce off the lows following the sharp sell-off. Bundesbank President Weidmann is scheduled to speak today, and given his recent comments you can’t imagine he will say anything to boost risk assets. We also get reads on German inflation, Italian retail sales, French consumer sentiment, US new homes sales and mortgage applications.

The other development which may get more airtime in European trade, although it certainly hasn’t caused too much of a follow-through risk-off move in Asia, is the talk (source Financial Times) that Germany and a number of its allies may be distancing themselves away from the bank recapitalising, putting off the ‘scheme indefinitely’. This is a space we are certainly keeping an eye on and it has the premise to turn things around quite viciously. However, perhaps this could also be seen as a short-term positive as well given it may encourage Spain to request assistance from the OMT facility sooner, rather than later, so that it could not only fund itself at lower rates, but could look to pass on borrowing to the banks. The issue here is that those who bought European banks on the hope that the negative feed-back loop between the sovereign and the banks that had been broken would be extremely disappointed.

The local market had a poor start to the session, but managed to find some support in the 4350 region. Although the ASX 200 is off its lows of the session, it is still down 0.3%, with the resource names among the biggest losers. Rio Tinto has declined 2.5% and BHP Billiton is down 1.6%. Rare earths miner Lynas Corp is facing another obstacle after it emerged that the company has been forced to renegotiate its debt covenants due to delays in Malaysia. Once again the majority of the gains are in the defensive names with healthcare, utilities and consumer staples edging higher. CSL Limited has climbed 1.6% and Woolworths has added 0.6%.

www.igmarkets.com.au

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