IG - Afternoon thoughts November 23, 2012

FTSE 5793 +2
DAX 7258 +13
CAC 3500 +2
IBEX 7882 +6
DOW 12860 +23
NAS 2602 +2
S&P 1393 +2

Oil 87.16
Gold 1729

Asian markets are having a fairly subdued day with the US being closed overnight and Japan offline today as well. With US markets closed, risk sentiment was solely pinned on developments out of Europe. Some positive European PMIs set a positive tone for equities in the European session and helped other risk assets remain fairly well bid. French, German and European manufacturing PMIs all showed a modest improvement and helped encourage investors. Growth was a key theme yesterday, with China also posting a positive PMI reading. Spain raised €3.88 billion at an auction, exceeding a target of €3.5 billion as it looks to take advantage of calmer yields to fund itself for 2013. However, this effectively delays hopes of Spain formally requesting a bailout and activating the OMT on hold. We haven’t had any fresh leads in the Asian session, but risk assets continue to hold near yesterday’s highs. AUD/USD is just shy of 1.04, while EUR/USD is a touch below 1.29.

Looking at the equities in the region, the ASX 200 is down 0.1%, the Shanghai Composite has climbed 0.5% and the Hang Seng has tacked on 0.3%. The Nikkei is closed today for Labor Thanksgiving Day. Ahead of the European open, we are calling the major bourses mildly firmer. The DAX has performed very well, pushing up 4.2% on the week. Technically there are signs the rally may run out of steam in the short term, with the index trading above (but failing to close above) the 61.8% retracement of the November 7 to November 16 sell-off at 7249. A break of this level could take the index to strong resistance at 7407 – the downtrend resistance drawn from the September 21 high. In upcoming European trade, we get reads on German IFO business confidence and final Q3 GDP. Strong results here could help the German market, which will be searching for direction given US markets will be closing early and should see minimal volumes. It is worth pointing out that the Spanish region of Catalan will be going to the polls on Sunday; it will be interesting to see if nationalist leader Arthur Mas will achieve the majority needed to hold a much-publicised referendum to form independence.

Of course, on Monday we also get the EU meeting (take two) on plans to help Greece achieve ‘debt sustainability’. Key European officials have been making the right noises in the last couple of days that an agreement will be met, however given Wednesday’s disappointment, will traders be as keen to bid up risk assets into the meeting, given we are just so accustomed to disappointment? A failure to form an agreement between the EU and IMF on Greece’s debt sustainability (i.e. getting debt to 120% of GDP) would almost certainly see the DAX, EUR and other risk assets take a strong hit.

The ASX 200 has shed 0.1% and is currently trading at 4407 with no dominant risk theme in place. Near-term support for the local index is at around 4400 and we are likely to see some consolidation at around that level after the recent positive run we’ve seen in local equities. Buying the dips might not be such a bad idea as there is no reason at this stage to believe this level should break. For the week so far, the ASX 200 has climbed 1.8% and this might be the beginning of a steady recovery. Of course, there are still a few hurdles ahead with the European finance ministers’ meeting on November 26 and fiscal cliff talks continuing. Should both events be concluded successfully, one can only assume we will be in for a good run into the end of the year and possibly get back to the levels we were trading in the lead up to the US presidential elections. Cabcharge (CAB) has plunged over 5% after being downgraded by JP Morgan to Underweight. The broker has downgraded its recommendation due to the significant uncertainty surrounding the future value of the CAB business model.

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