IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

FTSE 5790 -30
DAX 7291 -36
CAC 3413 -22
IBEX 7713 -71
DOW 13511 -4
NAS 2791 +4
S&P 1444 0

Oil 92.29
Gold 1777

Asian markets have had a solid session after picking up some positive leads from European and US trade. Risk sentiment improved through European and US trade, helped by mostly positive PMI releases. Italian and European PMIs were slightly ahead of expectations, but remained in contractionary territory. Over in the US, the ISM manufacturing PMI came in at 51.5 versus an expected 49.8. However, UK PMIs fell well short to be at 48.4 versus 49.5 anticipated. There have been reports making the rounds suggesting Spain is close to requesting a bailout. With the eurogroup meeting approaching, we could start hearing talk about Spain requesting a bailout ramp up. Fed chief Ben Bernanke was also on the wires and basically reiterated what he said following the QE3 announcement.

We saw some big moves in the currency space in US trade, but they have been fairly subdued in the Asian session. EUR/USD has been steady around 1.29 and USD/JPY has been fairly well bid at 78. AUD/USD was the one to watch today with the Reserve Bank of Australia’s monetary policy decision being the key event. There were growing calls for a cut today which turned out to be right, as the RBA cut rates by 25 basis points to 3.25%. This saw AUD/USD slump to 1.0315 immediately after the announcement. Looking at the equities in the region, the ASX 200 is leading the way with a 0.9% gain, while Japan’s Nikkei has risen 0.3%. After a big move higher yesterday, European markets are looking to give up some of those gains with a weaker open expected. Losses of around 0.4% to 0.5% are likely for the major European bourses. US markets are facing a relatively flat open. Today is not quite as busy a day on the economic calendar as yesterday was. Over in Europe, we have the Spanish unemployment change and European PPI. In the US, we only have total vehicle sales on the calendar. Event risk for the euro will ramp up this week ahead of the eurogroup meeting where some analysts are now feeling Spain will request a bailout.

The local market surged through its previous high of around 4421 on the back of the RBA’s interest rate cut. This leaves the ASX 200 headed for May highs at 4448.5 in the near term. Today was a good example of the market getting it right and economists getting it wrong, as the price action ahead of the announcement alluded to the fact that we would see a rate cut. Local equities were well bid, while the Aussie dollar was fairly subdued, indicating that the price action was skewed more towards a cut. The accompanying statement was also quite dovish as the RBA acknowledged that the Aussie dollar has remained higher than previously expected and terms of trade will likely fall further. The Central Bank also said key commodity prices are significantly lower and that the growth outlook for next year looked a little weaker. This certainly sounds like a downgrade in sentiment and warrants a dovish tone going into the end of the year. The next key level of support for AUD/USD is at around 1.028. However, we could see the pair consolidate at 1.03 ahead of this support. Retailers have responded well to the rate cut with JB Hi-fi rising 3.2%. Overall, the cyclical space has had a buoyant session with resource names leading today’s gains. Materials are up 1.2% and energy has risen 1.3%.

www.igmarkets.com.au

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