IG Markets - Afternoon thoughts Sept 28

FTSE 5804 +25
DAX 7336 +46
CAC 3462 +23
IBEX 7910 +68
DOW 13490 +4
NAS 2820 -2
S&P 1447 0

Oil 92.44
Gold 1781

Sentiment has remained positive in the Asian session with most risk assets adding on to yesterday’s gains. The much talked about Spain 2013 budget passed without incident and helped appease investors. The idea was for Spain to present reforms that would receive the EU’s stamp of approval and pave the way for a bailout. It seems it achieved that and received some positive comments from EU leaders like Commissioner Olli Rehn who felt it goes beyond EU recommendations. Gains in risk assets came despite some mixed data releases from the US including worse-than-anticipated pending home sales, but above expectations unemployment claims. China is also in focus after announcing a significant liquidity injection yesterday, fanning speculation that more stimulus is on the way.

Risk currencies were relatively flat at the start of the Asian session but found themselves bid higher and breaking through highs from US trade. AUD/USD printed a high of 1.0474 and EUR/USD went as far north as 1.294. Equities in the region are also mostly higher apart from the Nikkei which has dropped 0.8% on the back of disappointing industrial production data and a stronger yen. USD/JPY dropped to a low of 77.5 and remains near these lows. The ASX 200 is up 0.2%, the Hang Seng has climbed 0.3% and the Shanghai Composite has surged 1%. European markets will be playing catch up after missing out on most of the positive momentum from Spain’s budget and reforms. The major European bourses are pointing to gains of between 0.4% and 0.6%. However, US markets are pointing to a flat open. Ahead today, we have German retail sales, French consumer spending and Italian PMI. There isn’t much sensitive data on the US calendar but Chicago PMI and the HSBC final manufacturing PMI out of China tomorrow deserve some attention.

The big one though will be the Spanish bank stress test results. While traders have been waiting for an announcement during the Asian session, it looks likely that it will come closer to the European equity and fixed income open. From a very simplistic level, a number above €60 billion would be negative for risk currencies, while a number south of €60 billion could be taken positively. Of course on the other hand a really low number will be fodder for the cynics who would say the tests went stressful enough. The stress test aside Moody’s conclude its review on the Spanish credit rating and the move to junk status could take some of the wind out of the risk on sails, although there is a strong chance this will not come until after the close. The fact that the Finance Ministers of Germany, Holland and Finland have suggested that bank recapitalisation can only occur to new cases rather than legacy assets could certainly aid the case for a Moody’s’ cut. However, from a currency perceptive if Spanish yields do march north, every basis point that the ten-year heads back above 6% and towards 7% brings Mr Rajoy closer to asking for assistance, which in theory is euro and equity positive. Although the Spanish budget passed without incident, many analysts still feel the targets documented will not be achievable. We also still don’t know when the Spanish will request this assistance although October 21 is still probably the bookies’ favourite.

The local market had a soft start to the session but managed to recover and is now trading up 0.1%. For the quarter, the ASX 200 is around 7.1% higher at current levels. Just looking at the best performances of the quarter, we have infotech (+17.4%), healthcare (+12.8%) and consumer staples (+10.6%) all with double digit gains for the quarter. Financials are not too far behind with a 9.2% gain and of course with those yields, they make them very attractive. At the bottom end it’s not a surprise that we have consumer discretionary stocks languishing with only a 0.2% gain. Materials and energy sectors are around 4% higher with mixed performances in the resource names capping gains. Of course it’s hard to look past gold stock performances today after the precious metal rallied to around $1780 which is just below the recent high of $1787. OceanaGold has been a standout this quarter with the stock jumping 74%.

www.igmarkets.com.au

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