IG Markets - Afternoon Thoughts

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IG Markets - Afternoon Thoughts

FTSE 5700 +6
DAX 6786 +12
CAC 3325 +4
IBEX 6811 +9
DOW 13092 +19
NAS 2650 +8
S&P 1389 +4

Oil 89.77
Gold 1623

Across Asia, markets are firmer and have managed to maintain the positive momentum we have seen over the past few sessions. Risk assets mostly consolidated earlier in the absence of any fresh incentives ahead of this week's key events. However, we have seen sentiment improve in the Asian session on hopes for a bolder policy response from the ECB and/or more reassuring comments from Mario Draghi on Thursday that would formally endorse the reactivation of the SMP, possibly in tandem with purchases by the EFSF in the primary markets further down the road. The moral hazard argument is still very much front-and-centre and while structural reform is still ultimately what is needed, a two-pronged approach of SMP buying in the secondary bond market (backed up by EFSF bond buying in the primary market) certainly detracts some incentive from the sovereign to achieve this. Not to mention that for EFSF funds to be used for bond buying, Spain has to actually request a bailout - something many think is unlikely at this stage. Any commentary from officials will probably be the main catalyst for stocks today, but for now the market seems content to give Mr Draghi its backing.

Looking at the equity markets in the region, Japan’s Nikkei is 0.5% higher, the ASX 200 has climbed 0.8% and the Hang Seng has tacked on 0.8%. The Nikkei has been underperforming lately as the yen continues to enjoy some safe-haven buying. Many traders feel selling rallies is the best way to play USD/JPY at the moment. Shorting on USD/JPY weakness would be tough given the increased threat of intervention by the BOJ. Japan’s Finance Minister Jun Azumi told reporters in Tokyo today he wouldn’t rule out any measures to counter what he called ‘one- sided’ moves in the yen. With Asian markets remaining resilient, European and US markets are set to open modestly higher.

In the forex space there has been some good buying in euros and Aussie dollars, with AUD/USD touching a high of 1.0537 (the top of the recent channel) and approaching our target of 1.0550. However, to put a solid reason behind the mild risk-on strength is tough. It still seems the market is happy to buy into the idea that the ECB will meet elevated expectations, despite the continued talk that there is internal conflict within Mario Draghi’s ranks. One hopes he has enough persuasion to convince the anti-bond buying members that it is the right thing to do or much of the good-will that has been priced into assets will be unwound.

The local market surged through some key resistance levels today, with gains in resources propelling the ASX higher. At current levels (4279), the market is 4.5% higher for the month which is a solid start to the financial year. This is the best monthly gain for the ASX 200 since January. The resources sector has been struggling in recent days, but finally managed to stage a solid day ahead of China’s PMI numbers, which are due out tomorrow. Being the end of the month, it could also be a result of some fund managers’ window dressing and piling into the underperforming resource names. Rio Tinto is leading the way in the resource space after announcing it spent nearly $1 billion to participate in an Ivanhoe Mines rights issue. The banks continue to hold up well as investors chase high yields ahead of the reporting season. Commonwealth bank has climbed 1% and traded at its highest ($58.05) level since May 2010 today. Tomorrow is a big day for regional markets with China’s manufacturing PMI in focus.

www.igmarkets.com.au
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