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IG - Afternoon thoughts January 7, 2012

FTSE 6093 -3
DAX 7763 -13
CAC 3725 -5
IBEX 8423 -13
DOW 13398 -37
NAS 2715 -10
S&P 1461 -6

Oil 92.93
Gold 1660

Asian markets got off to a good start, but have since given up early gains perhaps on some profit taking after recent advances. Risk was well bid on Friday on the back of non-farm payrolls data which hit a sweet spot. While the data showed that the US labour market is improving, it certainly isn’t doing this fast enough for the Fed to withdraw QE much earlier than anticipated. The non-farm payrolls print showed a 155,000 increase (mildly better than 150,000 expected), while the unemployment rate ticked higher to 7.8%. This saw the US dollar pare gains and gave risk currencies some much needed relief. Unfortunately the recovery in risk currencies has hit a wall in Asian trade, with EUR/USD dropping back to 1.304 and AUD/USD back below 1.05 after having popped higher at the beginning of the Asian session. USD/JPY has remained relatively steady above 88 with sellers spooked by comments from new Prime Minister Shinzo Abe. With USD/JPY retreating from its Friday high, the Nikkei has also lost a bit of ground and is currently down 0.2%. However, with Abe continuing to mount pressure on the BoJ to act, buying the dips is likely to be the preferred strategy. The rest of the region is mixed with mild gains for the Hang Seng and Shanghai Composite, while the ASX 200 has lost a touch.

It just seems like markets are entering a consolidation phase after recent gains and with most markets trading at fresh highs 12-month highs. Ahead of the European open, we are calling the major bourses relatively flat to modestly lower. There is nothing significant to look out for on the economic front until later in the week. The ECB is set to meet and this is one of the highlights of the week. Although no change is expected in policy, there are reports suggesting the ECB might consider some form of easing. The ECB press conference is likely to carry even more weight as investors grow increasingly impatient about the OMT. Following recent comments from Christine Lagarde and Angela Merkel about European growth concerns, the ECB will be under pressure to act and prevent a deep contractionary period for the region. 1.3 will remain the key level to watch for EUR/USD with momentum at the moment seemingly to the downside.

After having responded well to the leads from US trade and pushing to a fresh high of 4750.7 earlier, the local market has given up all its early gains and is currently down 0.1%. Many were expecting the leap in iron ore prices to help underpin the iron ore miners and in turn the materials sector today, but this wasn’t the case as some of the big iron ore names actually lost ground. BHP is down 0.6%, Rio Tinto has shed 1.3% but Fortescue Metals has climbed 1.5%. Lynas has jumped 9% after saying it will ramp up production over the next three months and its rare earths will be ready for sale within weeks. Atlas iron is now only marginally higher after having surged earlier following an announcement that it is on track to achieve a 12 million tonne annual output rate by December. Some of the defensive sectors have held up well with gains for the healthcare and consumer staples. Financials have continued to edge higher with most of the big banks rising around half a per cent. Commonwealth Bank has shed 0.5% and retreated from its recent highs.


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