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IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

FTSE 5740 +2
DAX 7130 +6
CAC 3434 -6
IBEX 7774 +10
DOW 12773 -23
NAS 2590 -6
S&P 1385 -2

Oil 89.10
Gold 1734

Asian markets are ahead today but have not quite mirrored the big gains seen in US and European equities, where we saw increases of around 2% and above. Markets were largely risk-on throughout European and US trade, as optimism that US politicians would find middle ground on the fiscal cliff helped spur a rally. Confidence is growing that a deal can be reached, as politicians from both parties continue to make some positive comments on working together to come up with a solution. Better-than-expected existing home sales data also helped to lift sentiment, along with optimism that Greece will receive the next tranche of aid. Sentiment took a hit early in Asia after Moody’s downgraded France’s government bond rating to Aa1 (from Aaa) and maintained its negative outlook. This headline sent some jitters through the risk currency space, with the euro feeling most of the effect. EUR/USD experienced a sharp sell-off from around 1.2817 down to a low of 1.277. However, the pair has since managed to find some stability and is well off its lows and back above 1.28. AUD/USD has also been an interesting one to watch on the back of the RBA’s monetary policy meeting minutes. The minutes haven’t had as much of an impact on the pair as some would have hoped but they certainly leave the door open for further rate cuts. However, this doesn’t necessarily mean next month, particularly when the US and China are showing signs of stabilisation.

Looking at the equities in the region, the Nikkei is flat ahead of the BoJ’s monetary policy statement and press conference. Most market participants don’t quite know what to expect following the recent political developments in Japan. As a result, it could turn out to be a non-event, with investors choosing to focus on the elections and potential policy going forward. USD/JPY has also been fairly muted ahead of the BoJ and stuck in a range between 81.20 and 81.40. Elsewhere in the region, the ASX 200 is 0.5% higher and the Hang Seng has firmed 0.9%. Ahead of the European open, we are calling the major bourses relatively flat to mildly firmer. We have been seeing some positioning ahead of the upcoming EU meeting to discuss Greece, where it is widely hoped that the IMF and EU will come to an agreement on Greece’s deficit target. The strong recovery we’ve seen in the euro after having hit early lows suggests market participants are positioning themselves for a positive outcome. Bloomberg is reporting the meeting will start at 3am Sydney time, but there is chance we get headlines before this. We also feel Ben Bernanke’s address to the New York economic club will be key, given the market believes the Fed will announce a US$45 billion US treasury package in December to co-exist with its current mortgage-backed security purchase program. A failure to hint that this is on the way may cause risk assets to sell off. Of course on the other hand, if the Chairman gives the right indications that the US treasury program will be implemented after the conclusion of ‘Operation Twist,’ it could see a continuation of last night’s risk rally.

The ASX 200 has climbed 0.5% to 4385 after picking up on positive leads from US and European trade. The RBA’s monetary policy meeting minutes, released this morning, haven’t had much of an impact on the ASX 200. The broader global macro-economic themes are currently dictating sentiment and investors remain fixated on that. Cyclical names are leading the local gains after a fairly risk-on European session. The resources have continued their run from yesterday and seem to be attracting buying interest after having been significantly sold off recently. BHP Billiton has added 1.4%, Fortescue Metals has jumped 4.3% and Rio Tinto is up 1.9%. Financial names are mixed with Westpac and ANZ Bank higher but Commonwealth Bank down 0.5%. Defensive sectors are lagging with telecoms and utilities weaker.


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