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IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

FTSE 6286 +4
DAX 7664 0
CAC 3695 +1
IBEX 8086 -7
DOW 13987 +9
NAS 2758 +4
S&P 1511 0

Oil 96.57
Gold 1673

Asian equity markets are firmer in afternoon trade led mainly by the break-out in yen. Overnight, current Bank of Japan Governor Masaaki Shirakawa announced that he will step down ahead of time by resigning next month rather than seeing out his full term, which expires in April. This news saw USD/JPY surge 1.17% to 93.52, showing that the 85-90 trading band has now well and truly broken and that the newly-stated 100 mark is on its way. During Asian trade, USD/JPY continued this trend up 0.2% to 93.90 and the strong correlation between the yen and the Nikkei looks fully intact, with the Nikkei surging 3% to 11,391 points on the yen devaluing (the Nikkei is now at levels not seen since May 2010). Abe euphoria seems to be gripping Japan and this news will clear a path for the Abe government to install a ‘bold and decisive policy leader’. Business leaders are strengthening calls for the government to continue on its current objectives, with the head of the world’s largest carmaker, Toyota’s Senior Managing Officer Takahiko Ijichi, stating that ever since the Abe government has taken power in Japan, ‘(it) feels as though Japan is filled with the spirit for economic revival’.

The Hang Seng (+0.40%) and the ASX (+0.87%) have followed Japan higher and have recovered most of their losses from yesterday. The ASX is now approaching a strong a resistance level of 4950 where it was heavily sold off during Monday’s trading session. It is also now approximately 3% off our house view of 4986, which is the 50% retracement of the 2007 high compared to the 2009 GFC low.

In local news, December retail sales figure disappointed (contracting 0.2%) and these are the first back-to-back declines since May-June 2011. AUD/USD dropped 24 pips on the announcement and has trended lower ever since. AUD/USD is currently trading at $1.035 ahead of Australian unemployment data out tomorrow. A poor result here will increase the likelihood of a March rate cut as the RBA holds its dovish view of the Australian economy.

Europe was a major focus of today’s Asian session as political instability in Europe was put on the backburner and peripheral bonds slid back (2-year Italian bonds dropped 10 basis points (bps) to 1.67% after reaching highs of 1.77%). Services PMI figures were put centre stage as better-than-expected final services figures came through. Although it registered a contraction, the rate was slower than predicted, with Spain topping forecasts at 47. EUR/USD switched back on as risk picked up, rallying 0.5% in US trade, and has since pushed higher during the Asian session to $1.359. This will alarm some in the eurozone and attempts to ‘talk down’ the euro have begun in earnest ahead of tomorrow night’s interest rate announcement and ECB press conference.

French President Francois Hollande is one such person and was quoted overnight as saying that the ECB should ‘steer’ the European exchange rate, or run the risk of deepening the recession on the continent. This jawboning has proven to be a spectacular failure so far, with the euro rising to 1.359 against the dollar and 86.88 against the pound.

The market clearly doesn’t believe that the comments of Mr Hollande hold much weight, and with the ECB balance sheet shrinking, and flows continuing into the currency during today’s trading, it would be no surprise to see the euro’s upward trajectory continue ahead of the ECB press conference tomorrow night.

Britain’s services PMI, also surprised on the upside, reporting a small expansion (51.5) versus a forecasted contraction (49.8). GBP/USD rose 30 pips on the news before continuing to slid on renewed recession fears. One thing these figures do suggest is at Britain’s dominant services sector is looking rosier and optimism among companies has jumped, which therefore may see the country avoid the triple-dip recession everyone fears.


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