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IG Markets - Afternoon thoughts 2/3/12

Across Asia, markets have risen today after risk assets bounced on improved sentiment in European and US trade. It was also encouraging to see markets shake off mostly disappointing economic figures. After the previous day’s volatility due to the LTROs and Fed Chairman Ben Bernanke’s comments, investors would have been happy to have a relatively quiet day. Although Mr Bernanke did speak again yesterday, it was the same script as the previous day so markets had therefore discounted his thoughts. In the Asian region, markets have generally been in a holding pattern after coming off early highs. There have not been any significant developments in the Asian session.

The yen has remained a talking point as it weakened against most major counterparts. USD/JPY is approaching a nine-month low after a government report showed the nation’s consumer prices fell for a fourth month, fanning speculation the central bank will expand monetary easing. Japan’s Nikkei is currently 0.6% higher. The Aussie market is also firmer (+0.3%), although significantly off its highs on a big recovery in the resource stocks following a bounce in commodities overnight. Hong Kong’s Hang Seng is nearly 1% higher with the financials leading the charge. Given the relative strength we have seen in the Asian region, US and European markets are pointing to a firmer start. Investors will be hoping to see the S&P hold above 1370.

Next week brings the Reserve Bank of Australia’s March interest rate decision. The RBA is widely expected to leave rates unchanged particularly given Europe has made significant progress in rectifying the crisis which plagued it last year. This is likely to keep the Aussie dollar well supported at elevated levels. The accompanying statement is likely to be more important than the interest rate announcement itself.

The highlight of European trade was the Institutional Swaps & Derivatives Association (ISDA) announcing that the terms of the Greek debt swap did so far not constitute a credit event so there will be no payout. However, the important point is that this decision has been made on the current terms and the decision can change if, for example, collective action clauses are added to the debt swap. Most analysts feel that private sector participation will not be high enough to avoid CAC's and therefore the ISDA announcement does not change a great deal in reality. From a market perspective, the relatively muted response to the news was therefore understandable and the broader impact of a CDS event will not be known probably for another week or so (until the CAC's are introduced).

Although the February ISM numbers were below consensus at 52.4 (falling from Januarys number of 54.1), it seems market attention was more on jobless claims which were in line with consensus at 351k. Most of the data out of Europe was weak with a series of PMI’s released. However, ECB President Draghi commented late during the session that there were tentative signs of stabilisation, though the situation was 'very fragile'. The ECB was also 'reasonably satisfied' with the second LTRO operation. Such positive rhetoric from the ECB is quite encouraging for investors particularly after the roller coaster ride we’ve had with Europe. There is not much on the economic calendar tonight but investors will be looking out for further comments out of Day 2 of the EU Economic Summit. The discussions will be focused on the eurozone firewall and growth policies. New discussions such as the Greek PSI, the Irish referendum and external contribution to the firewall are also expected to play a part.

The big move seen in oil futures to over $110 a barrel was on the back of reports of a pipeline explosion in Saudi Arabia. However, this has since been denied and Nymex oil futures have since retreated from a nine-month high of $110.55 a barrel. . The price action shows investors remain very nervous about the oil market and potential supply disruptions arising from the Middle East. From an investment perspective, high oil prices are quite negative for global growth.


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