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IG Markets - Afternoon thoughts Dec 28

Good afternoon,

FTSE 5969 +15
DAX 7650 -6
CAC 3680 +6
IBEX 8293 +12
DOW 13081 -15
NAS 2628 -5
S&P 1418 0

Oil 91.35
Gold 1663

Asian markets have responded to the late turnaround seen on Wall Street to post some healthy gains going into the weekend. With US President Barack Obama having reportedly cut his holiday short and returning to Washington to meet US leaders for last ditch talks, there is growing optimism that a deal can be knocked before the deadline. Once again Japan has been the standout in Asian trade with a swathe of data being released today. With various economic readings continuing to show weakness, more pressure will be on the government and BoJ to act imminently. At the same time, a CPI reading below consensus shows that the economy is still under deflationary pressure and with the new government looking to impose an inflation target, there is plenty of room for easing. As a result, we saw further weakness in the yen and USD/JPY extended its gains to a high of 86.64. The pair is trading above 86 for the first time since August 2010. The Nikkei has also responded to the yen weakness and is 0.8% higher. It is a holiday in Japan on Monday and today is the last trading day of the year for the Nikkei. Looking at the equities in the rest of the region, the Hang Seng has climbed 0.2%, the Shanghai Composite is up 0.5% and the ASX 200 0.6% firmer.

Risk currencies have been relatively flat in Asian trade with AUD/USD trading at around 1.037 and EUR/USD around 1.324. Most risk assets will probably remain range-bound until we get a clearer indication of what to expect from the fiscal cliff negotiations. Ahead of the European open, we are expecting a mildly firmer start for most of the major bourses apart from the DAX, which looks like it’ll open a touch weaker. On the economic calendar we have France GDP and consumer spending, Spain retail sales and Italian PPI. US markets are likely to open relatively flat with the fiscal cliff developments in focus. On the economic front, we have Chicago PMI, pending home sales and crude oil inventories on the calendar.

The ASX 200 has charged 0.6% higher and is currently trading at 4675 after having traded as high as 4688.6. This is a fresh 19-month high for the local market with the Santa Clause rally in full swing. Today’s gains have led the market to a 1.1% gain for the shortened trading week. Market participants are hoping US leaders can return to fiscal cliff negotiations over the weekend and knock up a deal before year’s end. The materials sector is leading the local market’s gains with iron ore heavyweights well under way after a jump in iron ore prices. Iron ore extended its gains to 139.40 and this is a big factor for the local market heading into the end of the week. BHP Billiton has tacked on 1.1%, Rio Tinto is up 1.8% and Fortescue Metals has climbed 2.2%. There has also been a recovery in some of the gold names after the precious metal gained ground yesterday. Newcrest has advanced 0.5% and OceanaGold surged 1.5%. In the industrials space, Boart Longyear is one of the best performers of the day, jumping 7% with its price action looking to fill the gap from the August sell-off. Financials are also contributing to the gains with the big banks all rising around half a per cent. Some of the defensives are lagging; particularly the telecoms which are currently flat.

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