IG - Afternoon thoughts December 19, 2012

FTSE 5953 +17
DAX 7670 +16
CAC 3659 +10
IBEX 8206 +37
DOW 13341 -10
NAS 2705 +1
S&P 1438 -1

Oil 88.37
Gold 1675

Asian markets are mostly firmer as participants continue to bet on an imminent fiscal cliff deal. Reports from US trade seemed to suggest US leaders are much closer to a deal with House Speaker John Boehner’s Plan B effort that is getting some attention. It is clear that leaders are willing to negotiate and as a result there is optimism that they can find some middle ground. However, the recent risk rally seems to have been confined to equities with other risk assets posting some mixed performances. As a result, some analysts feel equities might have gotten ahead of themselves as risk currencies tend to be a good indicator of what the sentiment reading is. Commodities have also remained subdued and are underperforming the risk space. EUR/USD was the standout in US trade as it moved back above 1.32 and continues to hold near 1.324. AUD/USD has actually lost ground in Asian trade and went down to test 1.05 before finding some support. USD/JPY has finally traded through its Monday post-election high of 84.36 and traded up to 84.44 today with yen weakness prevailing ahead of the BoJ meeting. As soon as USD/JPY filled the gap from Monday’s open, the pair has found buyers and also support from the 50-day moving average.

Yen weakness has driven the Nikkei’s gains today with the index breaking through 10,000 for the first time since April. Japanese investors are betting on some aggressive action by the new government as they look to bolster the economy. With Japan’s trade deficit also coming in wider than expected today, there will be growing calls for the BoJ to act tomorrow. As a result, the moves in the yen and Nikkei are probably due to positioning ahead of the BoJ meeting. The Nikkei is currently up 1.3%, the Hang Seng has advanced 0.7% and the ASX 200 is 0.5% firmer. Ahead of the European open, we are calling the major bourses modestly firmer. On the economic calendar we have the German Ifo business climate and European current account data due out. This might be a source of volatility for the single currency which seems to be in good stead at the moment. US markets are facing a relatively flat open with building permits and housing starts on the calendar. It is hard to be sceptical at these levels, particularly when markets are trending higher and the trend is meant to be your friend. As a result, the bears are likely to be spooked and rightfully so until we get confirmation of a reversal in trend.

The ASX 200 has advanced 0.5% and is currently trading at 4616 after printing a session high of 4627 earlier today. Once again, focus is on the progress of the fiscal cliff negotiations, with investors betting on a deal being reached in the not-too-distant future. Risk assets have led gains as markets continue to trade risk-on. The big iron ore miners are having a solid week and have extended their advances after iron ore prices held their ground above US$132 per tonne. Rio Tinto has tacked on 1%, Fortescue Metals is up 0.9% and BHP has climbed 0.7%. FMG was even higher earlier, but seems to have been hit by some profit taking after a 30% gain in a few weeks. Gold miners are lagging as the precious metal continues to struggle. Newcrest Mining has declined 2.7% and OceanaGold has dropped 3.6%. In the financial space, the big banks are enjoying modest gains while Macquarie has surged 2.3% after the recent breakout in price action. Surprisingly, some of the defensive names are performing better than the cyclicals, with CSL Limited rising 0.8% and leading the healthcare sector. Billabong is the worst performer of the day, dropping over 10% on the back of a profit warning. The fall in shares came despite the company announcing a takeover offer.

ENDS

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