IG Markets - Afternoon thoughts May 31

FTSE 5285 -12
DAX 6275 -6
CAC 3012 -4
IBEX 6079 -11
DOW 12397 -23
NAS 2532 -5
S&P 1309 -4

Oil 87.59
Gold 1561

Across Asia, markets are weaker after picking up some negative leads from European and US markets. It was a typical ‘risk off’ session, which saw money flow out of risk assets and into safe-haven assets. European issues continue to rattle confidence and the waning US economic data. Yields on Italian and Spanish bonds spiked after an Italian bond auction fell short. The Italian government sold €5.73 billion against a maximum target of €6.25 billion. The average yield on the 5-year bond was 5.66%, up from 4.86% at the April 27 auction. The 10-year bonds sold at 6.03%, up from 5.84% last month. Concern that Greece will leave the euro also grew after an opinion poll showed Greeks want to see the terms of the bailout revised while Spain’s banking crisis remains unresolved.

Money flowed out of equities, risk currencies and commodities and into bonds, the USD and yen. As a result, Asian equities got off to a weak start today and have struggled for most of the day, although some of them are off their lows. A stronger yen has weighed on Japan’s Nikkei, which is currently 1.4% lower and is the worst performer in the region. Hong Kong’s Hang Seng is down 1.3% and the Shanghai Composite has shed 0.5%. The ASX 200 is down 0.8% and is significantly off its lows. US and European markets are facing losses at the open with some follow-through selling expected. It is a big night of data on both fronts and this is likely to determine sentiment later today. In the US we have ADP’s non-farm employment change, preliminary GDP and unemployment claims as the main ones to look out for. Over in Europe, we have German retail sales, unemployment change as well as French consumer spending. ECB President Mario Draghi is also expected to make some comments. In the commodities space, it is going to be an interesting session for energy plays, with natural gas storage and crude oil inventories due out.

After a brief pop higher on the back of the some seemingly positive headlines from the EU Commission, it was all downhill for EUR/USD, which fell below 1.24 and printed a low of 1.2362. A headline that the EU Commission could envisage direct recapitalization of banks by eurozone permanent bailout fund (ESM) temporarily lifted the euro. However, risks still appear to be skewed to the downside amid fading hopes for any concrete policy action. No hard policy decisions seem likely ahead of the Greek election on June 17, portending more nervous trading in the interim.

The local market managed to come off its lows today and has held fairly well considering the significant downside pressure it was facing. Early price action for the market suggested we could have been headed for last week’s low of 4024, which the bulls had to defend to prevent a steep slide to 4000 and potentially lower. Most of today’s losses came from the cyclical sector as resources and financial names struggled. NAB was one of the worst performers after going ex-div, while Fortescue Metals dropped 3.6%. Gold miners have outperformed after gold prices gained ground. Defensive names held up well, with healthcare and utilities sectors in positive territory. Once again, economic data disappointed today as building approvals came in much lower than expected. However, there was some positive as private capital expenditure exceeded expectations. After dipping below 0.97 earlier, AUD/USD has recovered and looks to be consolidating just above 0.97. However, there are still several negative factors at play including risk aversion, a slowing China economy and a potentially prolonged monetary easing cycle.
Stan Shamu
Market Strategist
www.igmarkets.com.au

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