IG Markets - Close of Markets Wrap

Asian markets are trading lower today with weak leads coming from the US and worse than expected Japanese economic figures.

With the Yen also strengthening overnight, most notably against the US dollar and the British pound, the Nikkei is trading lower by 1.6%. The Kospi is weaker by 0.8%, while the Hang Seng appears to be trading just off the lows of the day, falling 0.5%. The Shanghai composite is seeing profit taking after a strong week and has currently retreated 1.0%.

The Australian market reacted negatively to the US lead and weakness in Asia with the ASX 200 closing down 0.7% at 4493. Caution was there for all to see with the index trading in a 20 point range up to the close.

The bulk of the points were detracted by the financial sector which closed down 0.8%, with all four big banks are lower between 0.6% and 1.1%. Macquarie saw the heaviest selling, weaker by 3.1%.

The Group said earnings from Macquarie Securities, Macquarie Capital, the Fixed Income, currencies and commodities divisions fell in the first quarter from a year ago and unless markets improve could continue to underperform. There were bright spots, such as its Funds and Banking divisions, but on the whole traders felt disappointed and sold out. Some analysts do feel it offers value on 8.5 x 2011 price earnings and is a compelling price to book, with Credit Suisse retaining its outperform rating.

In the materials space, losses were broad based with heavyweights BHP and RIO Tinto down marginally on the day. Whilst we saw copper prices overnight hitting a 12 month high due to a weaker US$, the sector is again living up to its name as a proxy of risk.

The big news today in this space is the surprise proposal from AWB to merge with Graincorp. Certainly AWB reacted positively trading up 3.6%, whilst Graincorp lost ground. The transaction, which still has to get ACCC approval, will be EPS accretive for both companies and offers synergies of $40m a year.

The energy sector also saw selling despite a stronger crude price overnight. All names closed lower, however Woodside Petroleum is the star performer with a loss of 0.3%. Caltex finished down 1.9% after being downgraded to Neutral from outperform by Credit Suisse on grounds it had a 12% rally in the past month and does not see any short-term catalysts
Energy resources of Australia provided the market with poor first-half earnings, down 82%, and even though analysts were expecting a weak result, it still disappointed.

It seems global markets are on the precipice of a big move in either direction. Right now there seems to be enough information out there to entice both the bulls and the bears and that is why the Australian market is failing to break convincingly above 4500. Next week will be key and there should be a pickup in volatility given we have the ISM manufacturing and services figures out, which are considered to be leading indicators. Additionally we have the all important Non-Farm job numbers due out with analysts calling for 110,000 private sector jobs created.

Domestic traders don’t have to look far for key economic releases and tonight’s GDP print in the US will be heavy scrutinised. At present economists are calling for a slowdown in the growth rate from 2.7% to 2.6%, although given the poor data releases of late, a below expectations result cannot be overlooked. Whilst GDP is a backwards looking indicator, it seems to be getting more credence this time around as the inventory build up has pulled back and US growth is now so critical for the risk trade. A stronger than expected number would be good for equities but it is hard to understand how the US$ will trade. Will we see a stronger US$ or will it weaken against the Euro and Australian dollar as risk comes into the market? The best way to measure sentiment is the USD/ YEN cross to get an understanding of trader’s reaction, with dollar strength meaning the GDP print was taken positively.

The Chinese PMI data due out on Sunday will be critical to maintain the rally we have seen in commodity prices, with copper now at 12-week highs. Sentiment has shifted recently to a feeling that the Chinese have done enough to curb inflationary pressures, whilst having the firepower to stimulate the economy if it slows down too much; this has helped the likes of BHP to trade above $40.
Although analysts expect the PMI data to slow this month to 51.4, a reading below 50 (showing contraction in manufacturing) would be highly negative for the risk rally we have seen in commodity-based stocks and currencies and a sell off would ensue.

Chris Weston
Institutional Dealing
IG Markets

ENDS

Discover more about CFD trading with IG Markets, the world’s No.1 CFD provider*.

BUDGET 2012:
Parliament Debate Live - Video Of Budget 2011
Keith Ng Interactive Graphic: How the Budget Breaks Down
BUDGET 2012 - FULL COVERAGE: Reports / Analysis - Press Kit - Reaction (from everybody) - Previews (from everybody) - Pre-Budget Announcements

Gordon Campbell: On the Budget’s Spreadsheet Victories

It wasn’t as if expectations were sky high, exactly. Chances are, it was always more likely that we’d be seeing Bigfoot rampage through the Beehive lock-up than catch a glimpse of a credible growth agenda from this government. More >>

Sludge Budget Report - Short The Dollar! MEMO: To international bankers FROM: C.D. Sludge Please short the dollar! It'll be good for both you and us. And you know you want to. Greexit, Eurogeddon... watch out... flight to quality and all that. Follow your instincts. The NZ Debt Management Office has been so surprised at the unprecedentedly low interest rates that it can borrow at that it has already entirely pre-funded the 2013 fiscal deficit - all $8 billion of it! More >>

Pattrick Smellie Comment: Doddling along the best we can hope forCriticising Budgets for lacking vision or imagination is like shooting fish in a barrel, but even so, this year's Budget again feels like a missed opportunity. Perhaps it's the intrusion of real world needs that means the government couldn't make better political use of the $558.8 million it expects to gather in its first partial asset sale. More >>