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IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

FTSE 6342 +3
DAX 7854 +5
CAC 3787 +1
IBEX 8625 -18
DOW 13960 +6
NAS 2749 +5
S&P 1509 +1

Oil 97.53
Gold 1667

Asian markets have extended their gains as investors remain optimistic on the back of US earnings. Global markets have been on extended winning streaks and no doubt this would have caught out several traders who feel we are in overbought territory. Although equities are firmer in Asia, risk currency pairs have remained steady ahead of the Fed meeting. EUR/USD is sidelined just shy of 1.35 and AUD/USD is consolidating at 1.047. There haven’t been any fresh drivers of sentiment in Asia ahead of what might turn out to be a pivotal couple of days of trading in the risk space. Perhaps the stand-out though will be the FOMC meeting, with narrative expected to come out at 6.15am (AEDT). It worries us that the market is not expecting anything, although the Fed reads markets well and would not want to initiate a change of policy that would cause a significant sell-off. There has been a change of membership with four new members coming onto the board, which could in theory see at least one individual dissent from current policy. The market will also be keeping an eye on the language around the pace of US treasury buying, in which it previously said that purchases would ‘initially’ occur at $45 billion per month, and there is a chance this may change. If the Fed gives the impression that it is preparing the market for an early withdrawal of stimulus then we may see USD strength and risk weakness.

Looking at the equities in the region, the Nikkei has climbed 1.1%, the Hang Seng has advanced 0.8% and the ASX 200 is up 0.1%. USD/JPY has experienced a minor recovery to 91 and this has helped lift the Nikkei. China’s manufacturing PMI due out on Friday will be one of the key releases of the week. Following recent readings, it seems expectations are now riding high on China. Consensus is for an improvement to 51.1 (from 50.6); while the HSBC final manufacturing PMI is expected to rise to 52.1. Any disappointment in these figures is likely to be used as an excuse to sell heading into the weekend. Ahead of the European open, we are calling the major bourses mildly higher. It will be interesting to see Spanish GDP in European trade (7pm AEDT) with expectations of a 1.7% decline on the year. There is also an Italian and German bond auction to look out for. US markets are facing a marginally positive open with plenty to look out for. US data will be in focus with Q4 GDP expected to print 1.1% annualised, while ADP private payrolls and personal consumption will also be in focus. We are keen to see if a strong ADP or GDP print will actually result in USD strength ahead of the upcoming Fed meeting.

The ASX 200 has firmed 0.1% and is currently trading at 4895 after printing a fresh 22-month high of 4906.2. The materials and energy sectors are leading the way on the back of solid leads from BHP and RIO in London overnight. After several days of defensive stocks winning the trading battle, risk has finally seen some buying. We are also seeing some of the recently over-brought stocks pulling back. Wesfarmers delivered a strong second quarter sales report this morning, however after tearing away for the last eight weeks, ‘selling the fact’ has seen WES pull back 2.2%. Telstra is also in the same boat with RSIs at 80, and having now punched through the 61% retreatment line of the 2007 high versus the GFC low, TLS is down 0.9% ahead of its dividend on February 18. One of the headlines for the session has been Prime Minister Julia Gillard setting an election date of 14 September 2013. From a trading perspective, the stocks we would expect to benefit from a long lead-in time to the election would be in the media space. This would be from a viewership and advertising revenue perspective. However, we are yet to see this take effect with some of the key media stocks like Fairfax, APN, Seven West Media and Ten Networks all lower.


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