IG Markets - Afternoon thoughts Oct 11

FTSE 5771 -6
DAX 7205 0
CAC 3361 -5
IBEX 7615 -53
DOW 13342 -3
NAS 2733 +4
S&P 1431 -2

Oil 91.60
Gold 1764

Asian markets are mixed despite mostly negative leads from European and US trade. Early in the Asian session, the negative tone was enhanced further by the Spain rating downgrade. Spain was cut two notches by S&P to BBB- (from BBB+), with a negative outlook. This saw EUR/USD lose its grip on the 1.29 handle and slip to 1.2826 in the Asian session where it found some support from the 200-day exponential moving average. There was no dominant theme dampening sentiment in equities, but rather a variety of factors that kept the bulls at bay. Alcoa’s move to cut its forecast for global aluminium demand revived some of the growth concerns markets have been facing. This weighed on several industrial and materials names, as well as some commodities. The Aussie dollar has outperformed the risk space in the Asian session on the back of some jobs numbers. September unemployment came in at a worse-than-expected 5.4% (versus consensus 5.3%), while 14,500 jobs were added (versus 5500 expected). This has resulted in a spike in AUD/USD to 1.0278 with the momentum still positive. We are still likely to see selling into strength as the preferred strategy by traders, particularly if we approach the 1.03 level. As analysts digest these jobs numbers further, we feel they are unlikely to inspire enough confidence for the pair to sustain a rally.

Looking at the equities in the region, the ASX 200 is outperforming with a 0.1% fall. The local market is well off its early lows, helped by the better-than-expected employment change. Some disappointing machinery orders data from Japan are weighing on the Nikkei, which is down 0.2%. The Hang Seng has managed to edge higher with the financials leading the charge. Looking ahead to European trade, we expect a flat to mildly weaker open with the Spanish IBEX the main one to watch after the S&P downgrade. Analysts are starting to feel the Spain downgrade is a positive for markets as it might result in a spike in Spanish yields and force Spain’s hand to request a bailout. This seems to be what market participants want to see as it would activate the OMT programme. With this in mind, the euro is off its lows now with EUR/USD heading back to 1.286. On the economic front we have German and French CPI as well as the ECB’s monthly bulletin. Over in the US, we are expecting a relatively flat start with trade balance and unemployment claims data in focus.

The local market has been in the red all day but is impressively well off its lows yet again. Defensive names have helped offset losses, while the financials turning positive has aided the recovery. ANZ Bank has climbed 0.7%, Ramsay Healthcare is up 0.9% and Telstra has added half a percent. There have been some shockers in the materials space with Iluka dropping 7.4% and Lynas plunging over 15%. The former had a disappointing third quarter report while the latter is facing cash flow concerns following a delay in its Malaysian refinery. The big iron ore miners, BHP Billiton and Rio Tinto, have lost around half a per cent each. The ACCC’s decision to block Seven’s attempted bid for Consolidated Media has cleared a barrier for Newcorp’s takeover. Seven has since backed Newscorp’s US$2 billion bid which will now seek the approval of Newscorp shareholders at its October 31 meeting. We don’t expect any big surprises from the meeting and Newscorp shareholders are likely to back it.

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