IG - Afternoon thoughts January 8, 2012

FTSE 6069 +4
DAX 7727 -6
CAC 3706 -1
IBEX 8415 -4
DOW 13370 -14
NAS 2720 -4
S&P 1460 -2

Oil 93.16
Gold 1648

Risk assets are mainly in a holding pattern as investors exercise some caution after the recent gains. Equities in US trade retreated with some pinning this to scepticism on company earnings as we approach reporting season. However, risk currencies were mostly flat to modestly higher reflecting the subdued sentiment currently dominating markets. After the recent run, we were always headed for a period of consolidation or pullback as investors search for fresh leads to push the market higher. As a result, Asian markets are mostly weaker. However, risk currencies are mixed with no specific risk theme in play. AUD/USD managed to hold above the 1.049 level after having pushed to a high of 1.0517 ahead of the Australian trade balance numbers. EUR/USD enjoyed a strong bounce off 1.3 and continues to push north in Asian trade with a high of 1.314. USD/JPY has not done much and remains below 88 despite recovering from its early lows. Looking at the equities around the region, the Nikkei, Hang Seng and Shanghai Composite have shed around half a per cent each, while the ASX 200 is down 0.1%. There is nothing much in it at all and perhaps the minor recovery in risk currencies is a good indicator of sentiment heading into tonight’s session.

After a sharp sell-off in recent sessions, it is not too surprising to see the single currency enjoy some relief. However, this does not really change the structural issues the euro is currently facing. The eurozone economy is yet to show any strong signs of recovery and the OMT programme is yet to be activated. When the ECB meets later this week, its President Mario Draghi is likely to be under pressure to act, with some analysts even talking about negative rates. Ahead of the European open, we are calling the major bourses relatively flat. Later today, we have a data dump from Europe including German and French trade balance figures, the unemployment rate and German factory orders. With so many issues for the euro to contend with this week, traders are likely to favour selling the single currency into strength. US markets are facing a mildly softer open with focus likely to remain on upcoming earnings.

The local market got off to a positive start with defensive names mostly leading today. There is some rotation out of risk names and into defensives. Telstra has tacked on around 1% and is testing the $4.50 level as investors chase some of the yield plays. We are also seeing similar performances in the healthcare space with gains for Ansell (+1%) and Resmed (+0.6%). Miners are underperforming despite iron ore prices continuing to edge higher. There seems to be a sense that iron ore and related miners are due for a correction in the near term after the recent monster rally. The energy space is holding up quite well today with Linc Energy up nearly 8% after breaking the 6000 barrels of oil per day mark and tripling its oil production in less than 12 months. Retailers are holding up well ahead of tomorrow’s retail sales data. JB Hi-fi has surged 3%, Harvey Norman has advanced 1.5% and David Jones climbed 1%. Retails sales are expected to show a 0.3% rise and there is speculation that a strong performance during the festive sales could see this figure exceeded. The banks have had an interesting day with Westpac (+0.5%) possibly benefiting from some rotation out of Commonwealth Bank (-1.4%). CBA has been cut to sell (from neutral) by UBS with a $55 price target.

ENDS

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