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IG Markets - Afternoon thoughts 31/12/12

IG Markets - Afternoon thoughts 31/12/12

FTSE 5897 -28
DAX 7612 Closed
CAC 3604 -16
IBEX 8054 -77
DOW 12889 -49
NAS 2594 -12
S&P 1395 -7

Oil 90.69
Gold 1660

Asian markets have given back some of Friday’s gains as investors continue to monitor the wires for any fiscal cliff headlines. Although markets are weaker, risk appetite has shown signs of improvement early in Asia as some bet on a last minute deal being worked out by US leaders. As it stands, the Senate meeting failed to yield an outcome but will reconvene later today to try and find some middle ground. Should they find middle ground, this would then be put to a Senate vote. There is clearly a lot of uncertainty as to how this will all play out at the moment and headline risk will remain rampant heading into the end of the year. The Aussie dollar has come to life in Asia today with AUD/USD rallying to a high of 1.041 after trading at around 1.037 at the open. Gains in the pair have been mostly pinned to anticipation of a strong reading in China’s HSBC final manufacturing PMI, which once again showed strong signs of improvement. The reading came in at 51.5 which was well above the 50.9 analysts had forecast. The strong PMI reading has also lifted the Shanghai Composite which is outperforming the region with a 0.6% gain. Looking at equities in the rest of the region, most of the markets are closed and the few that are open have shortened trading days. The ASX 200 finished the day down 0.5% and the Hang Seng is 0.2% softer, while the Nikkei is closed today.

The euro has been relatively flat through Asian trade after having experienced some volatility on Friday. EUR/USD has been sidelined at 1.322 with traders awaiting headlines from the fiscal cliff. Ahead of the European open, we are expecting a weaker start for most of the major bourses with the DAX closed for a bank holiday. We have early closes for the UK, Spain and France today while all markets will be shut tomorrow for the New Year’s holiday. The only economic release on the calendar will be housing equity withdrawal in the UK. Unless there are significant developments on the fiscal cliff front, we are likely to see a very subdued European session. US futures are pointing to a lower open ahead of the New Year’s break with nothing on the calendar but undoubtedly market participants will be fixated on the fiscal cliff.

The ASX 200 has shed 0.5% and closed the final session of 2012 at 4649. Regardless of today’s losses, it has been a good year for the local market with approximately a 15% gain mainly led by the financials. Considering all the hurdles investors have had to overcome, it has not been a bad outcome at all. We expect to see another strong year next year and this time it is likely to be a materials-led recovery. We have already seen strong signs of stabilisation in the miners and this makes a good base to build on heading into 2013. Today’s firm China PMI reading only confirms the notion that China is back on track heading into 2013. This, along with Japan-focused on stimulating the economy will be the key factors underpinning Asia next year.

Market Strategist

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