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IG Markets Afternoon thoughts 1st August 2011

Across Asia, regional markets are all higher as traders cheered this morning’s eleventh hour agreement to raise the US$14.3 trillion US debt ceiling However, it’s not quite a done deal just yet as it still needs to be voted through both houses and there is still the threat that one of the rating agencies might downgrade the US’s AAA credit rating anyway. Nonetheless, the main Asian indices are all higher between 0.2% and 2%, with the Nikkei 225 leading the way.

In Australia, the ASX 200 is currently 2% firmer at 4515, just off its intraday high of 4517. Gains for the day have been the result of a last minute bipartisan deal between Democrats and Republicans to lift the US debt ceiling and avoid a catastrophic default.

Today’s advance is as much a relief rally as anything else however investor attention will soon refocus on the US economy’s lacklustre momentum as illustrated by Friday’s paltry GDP reading. But for today at least, investors are just happy we seem to have averted an apocalyptic event. Leaders on the day include the materials, financial and energy sectors which are all up in the vicinity of 2%.

As we talked about last week, it seems Washington has averted a potential crisis and compromised on a deal that will see the US debt ceiling lifted and a default averted. Judging by the market’s reaction over the last week, everyone seemed to be of the view that they simply couldn’t afford not to come up with a deal. Whilst markets did post significant falls, everything was pretty orderly, with little fear or panic driving the sellers. The VIX only traded to a high of around 25, not much above its long term average of around the 23 level.

Nonetheless, the reaction from markets today has been very positive, with many traders breathing a sigh of relief. No one really thought it would go down to the wire like it has done. Assuming it gets passed by both houses, which should be the case then there will be one less headwind for the market to have to deal with. Having said that, I’m sure traders will find something else to worry about; perhaps the state of the underlying economy.

It seems the next battle for market participants is going to be a tug of war between positive Q2 earnings and underlying economic weakness. Everyone had been worrying about a softening of the US economy during Q2 following a robust first quarter. These assumptions were flushed down the toilet on Friday when the US downgraded Q1 GDP growth from 1.9% to a meagre 0.4%; that’s a staggering 79% downgrade to growth.

Once again these numbers prove that economic data we anticipate, talk about, react to and overreact to is essentially completely meaningless. We see it time and time again with monthly non-farm payrolls numbers and quarterly GDP releases; it makes an absolute mockery of the whole ‘economic release’. One has to ask what on earth these economists are doing and why we even bother releasing economic figures At least company accounts and results are actually audited! It seems the market has been living a lie as to the extent of the US recovery.

Ben Potter
Market Strategist
IG Markets


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