IG Markets - Afternoon thoughts Oct 5

FTSE 5847 +19
DAX 7336 +31
CAC 3418 +17
IBEX 7837 +24
DOW 13573 -2
NAS 2831 +2
S&P 1462 +1

Oil 91.44
Gold 1793

Asian markets are mostly higher with risk assets remaining buoyant on the back of some positive leads from European and US trade. Comments that the OMT programme is ready to be deployed and it is up to the governments now to request it certainly set the tone for risk assets. However, the ‘will they/won’t they’ dilemma on Spain requesting a bailout continues to weigh on Spanish bonds, as yields rose yet again despite a successful bond auction. Over in the US, unemployment claims were slightly better than expected (367,000 versus 371,000), while factory orders also exceeded expectations despite another fall. As a result, risk currencies, particularly the euro, were well bid as EUR/USD is back above 1.03 and continues to consolidate north of that level. Even the Aussie dollar enjoyed some relief after a sharp sell-off this week. AUD/USD has climbed to 1.027 after having ventured below 1.02 yesterday. However, the preferred strategy on AUD/USD remains to sell on strength given the dovish RBA stance.

Looking at the equities in the region, the ASX 200 is outperforming with a 0.9% gain and the 4500 level within sight. However, Japan’s Nikkei is a touch lower after the yen gained a bit of ground as the BoJ kept its powder dry. Hong Kong’s Hang Seng has risen 0.3% with the financials and materials leading the way. European markets were a bit lower yesterday and are looking to play catch up today with mild gains expected at the open. US markets are likely to open relatively flat. It’s all about the US non-farm payrolls later today, although many prefer to trade the crosses given the relatively unclear implications that a poor number could have. Consensus currently stands at 115,000 jobs to be created, however while we think a better-than-expected jobs number should aid risk appetite and therefore push up the AUD, the difficulty comes with interpreting a poor number. On one hand it feeds into the view that the Fed can be more aggressive with future stimulus (which again is AUD positive), but on the other it helps Mitt Romney’s cause as it highlights the current weakness in the US economy. Mitt Romney adopts a strong USD policy and has been an outspoken critic of Fed Chairman Ben Bernanke’s easy money policy, therefore from a political sense you could make an argument that a weak number could in theory be USD positive.

The ASX 200 is currently up 2% for the week and has now convincingly broken above the 4450 resistance zone. We are currently just shy of the 4500 level with the materials space leading the way. It’s been all about the gold stocks after the precious metal rallied to $1796 (the highest level since November last year). Newcrest Mining has surged 3.2% and OceanaGold has climbed 3.5%. The big four banks are also trading higher; NAB and CBA have passed on 20 of the 25 basis point rate cut. Bank of Queensland has underperformed the sector, dropping 5% after announcing an increase in provisions ahead of its results on 18 October. An interesting situation is unfolding with Billabong, as the stock is flat after returning to trade following speculation that TPG is withdrawing its $1.45 a share bid. BBG confirmed talks with TPG are continuing despite some concerns after Bain Capital pulled out. The current price action (25% discount) suggests there is plenty of scepticism surrounding the takeover now.

www.igmarkets.com.au

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