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IG - afternoon thoughts and European opening calls 4/12/12

Heading into today‘s session we had been predicting the ASX 200 to open modestly weaker, with the benchmark index called down 7 points or 0.15% at 4524. As things currently stand, the market is 10 points or 0.2% lower at 4521, with most sector indices marginally in the red. While a softer open was always on the cards this morning based on US leads, most of the day’s action was expected to have come this afternoon after the RBA rates decision. However, in cutting rates by 25 basis points as was widely predicted, the market’s reaction has been absolutely minimal, with the ASX 200 remaining essentially unchanged. Based on a string of recent weak data points, such as capex spending, job ads, retail sales and building approvals, a multitude of international uncertainties spanning Europe, China and the US and a stubbornly high AUD, it seemed the RBA felt compelled to act with additional easing measures. Yesterday’s flat October retail sales print (against estimates of 0.4% growth) would appear as confirmation that retailers, despite the string of rate cuts in recent months, are yet to see any material improvement in consumer spending. The Christmas shopping season is a crucial period for all retailers, where some make more than 40% of their annual profits, so a buoyant consumer is critical to their bottom-line performance. Shares of the big department stores as well as the likes of discretionary retailers such as Harvey Norman and JB Hi-Fi are mixed after today’s decision. Turning to the European session, yesterday we saw European equities finish marginally higher and the euro modestly firmer against the dollar, with advances driven by a fall in peripheral European debt yields, brought about by Greece announcing details of its debt buyback program. The debt buyback, by way of a Dutch auction, is a key component in the efforts of lenders to put Greece’s debt levels back on sustainable footing and will enable the indebted nation to receive crucial bailout funding to allow it to stave off bankruptcy. While not a definitive solution, any form of debt forgiveness will ease the burden on Greece’s finances and help to ensure it does not have to keep returning to the international lending community for bailout funding. This positive development was offset by a weaker-than-expected US manufacturing PMI print (49.5 versus 51.3 consensus), ensuring gains across European equities and the euro itself were marginal at best. On today’s economic calendar we have Spanish unemployment, European PPI and UK construction PMI to look forward to; however, as is now the norm, headlines surrounding the fiscal cliff are likely to be the major influences of market sentiment. Ahead of the European open we’re calling the FTSE -14 at 5857, the DAX -23 at 7412 and the CAC -7 at 3559.


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