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IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

FTSE 5940 -18
DAX 7631 -41
CAC 3654 -13
IBEX 8211 -53
DOW 13130 -182
NAS 2652 -2
S&P 1424 -20

Oil 89.05
Gold 1642

It is clearly all about the fiscal cliff at the moment, and as soon as headlines crossed that House Republican leaders cancelled the Plan B vote, risk assets tumbled. Growing optimism that leaders will knock up a deal has fuelled regional markets early, but this swiftly changed when the negative tape crossed the wires. With House Republican leaders seeming quite far apart on the proposal and only meeting again after Christmas, fears that we are still far from a deal have become apparent. There were some big moves in the FX space, with USD/JPY dropping from around 84.40 and dipping below 84, while AUD/USD declined from around 1.048 to 1.044. EUR/USD is back below 1.32 after having traded near 1.33 in the US session. The trend has been the same in Asian equities with an initial move higher being greeted by selling, which resulted in the major bourses trading in negative territory. The ASX 200 is down 0.4% after having traded at a 17-month high earlier, the Nikkei is 0.3% lower and the Hang Seng has shed 0.9%.

This has certainly been a lively Asian session as seen front and centre in the S&P futures, which dropped 2% to 1391 (March contract) in the blink of an eye. Clearly the market was thin and stops prevalent given the rapid snap back that occurred. However, futures are still indicative that European markets are likely to come under strong pressure on the open. Data is light, although in US trade we get reads on durable goods, consumer confidence, capital goods orders, Chicago PMI and personal income/spending. Of course this will no doubt be trumped by the uncertainty we have seen from the failure to pass the tax hike bill. Many will ask if John Boehner has enough support from his own party ranks, especially after Larry Cantor had confidently stated they would get the votes, which in theory is fundamental to getting any deal done. President Obama would probably prefer a compromise was reached so the US can go on to function properly in 2013, however he would take comfort in the understanding that many are siding with the Democrats and his post-tax bill rejection comments that his priority was getting a deal done, clearly was an act to push public sentiment in his favour. Elsewhere we get Q3 GDP reads in the UK, Norway and Canada, UK current account and consumer confidence reads for Germany and Italy.

The ASX 200 charged higher this morning and rallied to a fresh 17-month high of 4658.7 before the key reversal lower occurred. Financial names are outperforming today with all the big banks posting modest increases. Yield plays tend to benefit when investors are trying to exercise a bit of caution in times of uncertainty. ANZ, CBA and Westpac are all over 0.5% firmer. Miners have turned with gold names the worst hit as the precious metal continues to lose ground. BHP Billiton and Rio Tinto are over 1% softer, while Newcrest Mining has given up 1.3%. Boart Longyear (BLY) has advanced after the company announced it has been aggressively reducing overhead costs as it looks to counter a slowing market. Over the last three months, BLY has moved to cut overhead costs by US$70 million. With some of the world’s biggest miners shelving projects as commodity markets struggle, companies like BLY have come under immense pressure to act. BLY shares managed to break through $1.73 today and spiked to a high of $1.88. The $1.73 level is the top end of the gap from August, and we could see this gap finally filled all the way back up to $2.04 and beyond.

We highlighted gold in recent reports and overnight it broke and closed below the 200-day moving average for the first time since August. Taking a closer look at the options market, the most actively-traded contract was January $1600 puts, where over 1600 contracts were bought, relative to 365 contracts the day before. Silver also lost ground, finishing down around 4% on the day and also closing through the 200-day moving average. However, it found support at the 61.8% retracement of the June to October rally. Many blame the strong US GDP print which was revised higher to 3.1%, although there has been speculation that a large US fund was liquidating holdings given the potential increase in capital gains tax in 2013. The November pivot low at $30.68 could act as upside resistance in the near term.


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