IG Markets - Afternoon thoughts Sept 27

FTSE 5783 +15
DAX 7304 +27
CAC 3434 +19
IBEX 7851 -3
DOW 13463 +49
NAS 2789 +7
S&P 1438 +5

Oil 90.10
Gold 1755

We have seen a strong bounce in risk assets in the Asian session on the back of news about China stimulus. This has helped risk assets maintain the recovery witnessed in US trade. We had seen steep losses in European trade after investors grew increasingly pessimistic over Europe after Germany, the Netherlands and Finland announced that ESM bank recapitalisations should only apply to new cases. This effectively puts the pressure back on governments and does not help alleviate concerns over struggling countries like Spain. However, calmer heads prevailed in the US session with risk assets finding some stability. As a result, risk wasn’t too badly beaten up at the start of Asian trade and we have since received a lift from the China news. Reports that the PBOC will inject CNY365 billion in the money markets this week have helped regional equity markets and risk currencies come off their lows and could be a key catalyst for a turnaround in the Asian session today.

AUD/USD bounced from a low of 1.0328, printed in the US session, and tested 1.04 on the back of the China news. EUR/USD came off a low of around 1.284 and is now trading at around 1.288, with 1.29 in sight. With these key risk pairs approaching some important levels, we get the sense we are in for some volatility ahead. A break of resistance could result in a swift move higher, or we could see these levels rejected and recent losses extended. Spain will be the key risk event later today and could be the catalyst for price action into the end of the week. Looking at the equities around the region, the ASX 200 has erased early losses and is currently up 0.3%. Hong Kong’s Hang Seng is 0.6% higher and Japan’s Nikkei is relatively flat. The major European bourses are in for a firmer start today after yesterday’s sharp sell-off. Gains of between 0.3% and 0.5% are expected for most of the markets apart from the IBEX which looks like it will be relatively flat. US markets are also in for a positive start with some data on the calendar to focus on. We have unemployment claims, core durable goods orders and pending home sales as the key data points to look out for.

Later today, the market will be focused on Spain’s budget and banking sector review. Already, protests opposing austerity measures are taking place and there is a risk of this heightening following the structural reforms plan and budget. While the public will no doubt continue to vent its anger at the anticipated reforms, the price action in the capital markets could be very different with upside risk potential if the EU releases pleasing commentary about the submitted reforms. The bulls would love to see the EU gives the reforms the stamp of approval, which in turn would give the Spanish government the confidence to turn to the OMT in the hope the powers that be don’t put even further conditions on its economy. In a sense it gives the Spanish the chance to controls its short-term austerity destiny by imposing its own sanction rather than an external body.

The local market had poor start to the session but managed to stage a complete turnaround led by the materials. China injected not just liquidity into its money markets, but subsequently put a bid in risk assets ahead of quarter-end and golden week. The moves are equivalent to 40 basis points of RRR cuts. As a result, we saw Rio Tinto swing to a 0.4% gain and Newcrest Mining rise 1.2%. Financials have also enjoyed a solid performance. The healthcare space has been resilient all day led by CSL Limited which traded at a new all-time high of $45.98 today. The stock has also been supported by news it has started to consider options for progressing development of a drug which can prevent development of type 2 diabetes. Looking at an early Bloomberg read on next week’s RBA decision, out of 26 economists, seven (including NAB, WBC and AMP) are calling for a 25 basis point cut; at odds with OIS on 68% probability.

www.igmarkets.com.au

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