IG - Afternoon thoughts January 11, 2012

FTSE 6119 +17
DAX 7730 +22
CAC 3711 +8
IBEX 8675 +56
DOW 13471 0
NAS 2734 -2
S&P 1472 0

Oil 93.85
Gold 1673

It has been a confusing session for risk in Asia as sentiment swiftly turned negative on the back of the China CPI numbers. Interpreting China data is always a confusing task as it is often a double-edged sword. Of course yesterday the positive risk mood was set by the country’s trade balance figures, which smashed expectations. With China’s exports rising 14.1% versus consensus of around a 5% increase and the trade surplus itself smashing expectations by over $10 billion, investors were happy to pile back into risk. There were gains across the risk currency space, commodities and most equities. Another poor trade balance print from Japan this morning saw the yen extend its losses and lifted Japanese equities today. USD/JPY pushed through 89 and printed a high of 89.35 after Japan’s trade balance showed a narrower-than-expected surplus of ¥0.23 trillion (versus ¥0.31 trillion expected). Any weak Japanese data is now interpreted as further evidence that action is required from Japanese officials. Regional equities got a bit of a kicker at the open because of this, but it was short lived as China’s CPI data capped the recovery, coming in at a better-than-expected +2.5% (versus +2.3% consensus). The Hang Seng, Shanghai Composite and ASX 200 are all modestly weaker. Although this shows greater demand in China, it also stokes inflationary fears, which might lead to some form of tightening.

As a result, risk retreated across the board with AUD/USD declining from highs near 1.06 to around 1.057. The AUD had enjoyed a huge reaction to yesterday’s trade balance figures. EUR/USD remains at around 1.326 after getting a lift from ECB President Mario Draghi’s comments as well as a successful Spanish bond auction. Mr Draghi said the decision to keep rates on hold was unanimous and sees the economy improving later in the year. The question now is whether his comments will be enough to keep the single currency bid. Traders are likely to continue eyeing the option of selling the pair into strength, particularly in the 1.33 region. Ahead of the European open, we are calling the major bourses firmer with the IBEX likely to outperform its peers. Apart from the French government budget balance, there is nothing major to look out for on the European front. Market participants will continue to digest Mr Draghi’s comments and what they mean for the euro going forward, particularly with unemployment being a persistent issue and uncertainty around how the recent reforms will play out. In the UK, we have manufacturing production and industrial production on the calendar. US markets are facing a flat start with focus likely to remain on the earnings season, which has so far been reasonably positive. The US also has its trade balance figures due out later today with a $41.1 billion deficit expected.

The local market got off to a mildly firmer start but has since retreated 0.2% on the back of the China data. Underperformance in the big iron ore miners has been the main theme of the day and has been weighing on the overall market’s performance. BHP, RIO and FMG are all struggling with some even receiving a downgrade from Macquarie to Neutral (from Outperform) today. Scepticism in the big run in iron ore prices relative to the contract prices has a lot of investors questioning the discrepancy and exercising caution on the big miners. However, there have been pockets of strength in the materials space with the gold miners getting a kicker from the recovery in the precious metal. Newcrest, Medusa and OceanaGold are all positive. Overall it’s a mixed bag across the sectors with no dominant risk theme in place.

ENDS

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