IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

FTSE 5947 -7
DAX 7625 -11
CAC 3629 -24
IBEX 8238 -62
DOW 13109 -6
NAS 2634 -3
S&P 1418 -2

Oil 90.83
Gold 1659

Asian markets are enjoying a positive return to trading today with Japan’s Nikkei at the forefront of the gains. The index has been on a tear and added another 1.4% today, trading at levels not witnessed since the earthquake last year. The key ingredient for the Nikkei’s strength has been yen weakness, which has managed to lift the exporters. USD/JPY rallied to a fresh high of 85.78 on the back of comments by newly appointed Prime Minister Shinzo Abe and yesterday’s BoJ minutes from the November policy meeting. The message from Japan is clear at the moment; the incoming government will do everything in its power to weaken the yen and stimulate the economy. Mr Abe announced his cabinet yesterday and it is probably only a matter of time before we start hearing rhetoric from some of the ministers regarding the economy. Mr Abe has already made comments regarding an inflation target of 2%, maintaining USD/JPY at 85-90 and appointing a BoJ Governor with views aligned to those of the government. Tomorrow is another big day for Japan with plenty of economic releases on the calendar including manufacturing PMI, industrial production, jobs numbers and CPI. For the week so far, the Nikkei has jumped 4.3% despite having been closed on Monday. Looking at the equities in the rest of the region, the Hang Seng has climbed 0.5%, the Shanghai Composite is down 0.5% and the ASX 200 0.3% firmer.

Risk currencies have been relatively flat in Asian trade with AUD/USD trading at around 1.037 and EUR/USD around 1.323. Most risk assets will probably remain range-bound until we get a clearer indication of what to expect from the fiscal cliff negotiations. Ahead of the European open, we are expecting a weaker start for most of the major bourses apart from the DAX, which looks like it will open flat after having been closed on Monday. There isn’t much on the European economic calendar, apart from mortgage approvals data in the UK. This is generally not a high-impact event and is likely to have limited influence on the cable, which remains relatively sidelined. As a result, we expect a fairly subdued European session, with market participants likely to look for leads from Wall Street. US markets are pointing to a moderately weaker open with focus likely to be pinned on the fiscal cliff negotiations. On the economic calendar we have unemployment claims, consumer confidence and new home sales to look out for. These data prints will have a bearing on the greenback and could be a source of volatility after the Fed recently said it will use unemployment and inflation as key thresholds for the QE program. Of course, volume is likely to remain relatively light with many investors still on holidays.

The ASX 200 is mildly firmer at 4647, with fairly tight ranges maintained until we get a clearer indication of what to expect from the fiscal cliff negotiations. Iron ore names are having a good session as prices continue to show strong signs of stabilising. BHP Billiton has tacked on 0.4%, Rio Tinto is up 1.1% and Fortescue Metals (FMG) has climbed 2.6%. FMG shares have been lifted by news it will conduct an iron ore expansion, which will put it back on track to boost production capacity to 155 million metric tonnes (mmt) a year in 2013. The retail sector is also having a good day following reports of record festive sales helped by low interest rates. David Jones has surged 1.7% and Myer has advanced nearly 2%. Festive periods are generally make-or-break for many retailers, as most of their annual sales revenue is drawn from this period. The banks are mildly softer, possibly on the back of fiscal cliff concerns and moderate profit taking. CBA is down 0.4% and ANZ 0.1% lower, while Macquarie Group is 1.8% higher. The defensive sectors are lagging with healthcare and consumer staples relatively flat.

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