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IG - Afternoon thoughts November 16, 2012

FTSE 5672 -6
DAX 7029 -14
CAC 3375 -7
IBEX 7682 -14
DOW 12538 -4
NAS 2523 -1
S&P 1352 -1

Oil 85.96
Gold 1713

Asian markets are mixed as some market participants remained cautious on the looming fiscal cliff. Clearly the fears around the fiscal cliff are hurting investor sentiment in the US and this in turn is having a flow on affect to Europe and parts of Asia. Certainly this is not the case in Japan, where the Nikkei is up 1.9% and 2.7% for the week. Today, Prime Minister Yoshihiko Noda should dissolve the lower house of parliament and call for a near-term election on December 16. This has been one of the most interesting dynamics this week, as the implications of the LDP party taking back power after a three-year absence has the market thinking we are going to see much more radical action; not just by pro-active fiscal action, but it may also (despite the BoJ claiming independence) influence monetary policy in a much more aggressive manner. The central bank currently has an inflation ‘goal’ of 1%, but LDP party leader Shinzo Abe is optimistically calling for a 2-3% target, which in turn opens it up for extremely radical measures. Whether it can meet this target is up for debate, especially when its economy seems to be getting worse by the day.

However, it seems the market feels another change at the helm, both at a government and central bank level, could bring about better fortunes for its economy and potentially through a lower JPY. It seems that if the LDP party lives up to the polls’ predications then it will have the chance to have a greater say in who replaces current BoJ chairman Masaaki Shirakawa when his term finishes in early April, and from there it can choose exactly how radical a banker it would like. What we really need from Japan is some consistency, given the constant change of personnel both at a central bank and government level, however if it really wants to weaken the JPY and help its ailing export sector then buying foreign bonds would be a real solution to creating sizeable outflows from the JPY. The current regime is unwilling to do this, but any signs a new leader at the BoJ is ready to go down this road then traders will look to buy USD/JPY, AUD/JPY and the Nikkei in spades. We will watch this space, not just for its trading opportunities, but also as a nice side story from all the negativity towards the US fiscal cliff!

Looking at the equities in the rest of the region, the Hang Seng is up 0.4%, the Shanghai Composite is down 0.9% while the ASX 200 is modestly lower. Ahead of the European open, we are calling the major bourses mildly weaker. After yesterday’s GDP numbers, the European current account and trade balance figures will be closely watched. As expected, the ASX 200 has had a very subdued morning session. The local market is currently down 0.2% at 4340, right near where it opened this morning. With no local economic data on the calendar, there were no fresh leads to sway market participants in either direction. The financial sector is the worst performer today, with ANZ Bank dropping 1.7% and Westpac falling 1.2%. However, National Australia Bank has bucked the trend and is currently up 0.6%. It has also been a tough session for the resources sectors, with materials and energy names heading lower. Fortescue Metals is down 2% and Woodside Petroleum has shed 0.7%. Seven West Media (+28% for the week) and Fairfax (+11% for the week) have had a stellar run this week after both companies announced plans to pay down debt. Once again, defensive names are ahead with gains for consumer staples, healthcare and telecoms. This shows how nervous investors are about piling into cyclical stocks.


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