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IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

FTSE 5785 -15
DAX 7315 -17
CAC 3485 -17
IBEX 7817 -47
DOW 12866 -12
NAS 2640 -1
S&P 1396 -3

Oil 87.17
Gold 1741

Asian markets have picked up on the negative tone from US trade and declined in a fairly subdued session. Although we are seeing weakness at the moment, it generally seems markets are in a holding pattern after some of the big moves we’ve seen recently. The fact that risk currencies have been largely unchanged in Asian trade is testimony to the fact that we are in a holding pattern. The euro lost ground against the greenback as European and US traders showed little enthusiasm for the Greek debt deal which was announced during yesterday’s Asian trading session. With the deal doing little more than ‘kicking the can down the road’, and already effectively priced in, trader attention quickly returned to the US fiscal cliff discussions which appeared to have resumed their hostile undertones. Democrat Senate majority leader Harry Reid said he was disappointed with the lack of progress made in relation to the debt talks, appearing frustrated at the Republican’s lack of flexibility on tax increases for the wealthiest 2% of Americans. Until this tax issue is resolved, it seems unlikely that other issues such as cuts to spending and entitlements will be discussed. The apparent lack of progress created a clear ‘risk off’ bias to trading which resulted in EUR/USD falling approximately 50 pips over the course of the European/US sessions to close out US trade at 1.2943, where it remains essentially unchanged in early Asian trade. Elsewhere, the pound also slid on the ‘risk off’ thematic, falling about 15 pips to close the US session at 1.6022.

Looking at the equities around the region, Japan’s Nikkei has finally lost its grip after having been bid higher in past sessions. The Nikkei has dropped 0.8%, mainly as a result of the pullback we are seeing in USD/JPY which is now below 82 at 81.83. Some traders feel USD/JPY may come under pressure should fiscal cliff concerns escalate and fuel a rush to the yen’s safety. Should this eventuate, the Nikkei would likely come under pressure and possibly present fresh opportunities for entries on a pullback into support. The rest of the region is also struggling with the ASX 200 down 0.4% and the Hang Seng retreating 0.7%. Ahead of the European open, we are calling the FTSE -15 at 5785, DAX -17 at 7315 and CAC -17 at 3485. After having managed modest gains yesterday, we expect to see European markets play a bit of catch-up to the losses experienced in other regions. There is nothing major on the UK economic calendar. However, in Europe we have German preliminary CPI which is expected to show a minor contraction (-0.1%) and European M3 money supply data. US markets are set to open mildly weaker with new home sales data and the beige book in focus. Following yesterday’s moves in US trade, it is clear that any comments by US leaders on the fiscal cliff will result in some volatility and that we are in a headline risk environment. Once all the noise is taken out, it certainly seems like the global economy is in a better place and we are likely to start seeing markets mount a recovery.


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