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IG Markets: Afternoon Thoughts for Aug 02 2011

IG Markets: Afternoon Thoughts 02/08/11

Good afternoon,

Across Asia, regional markets are all lower, reversing yesterday’s gains as the US markets fell overnight following the much weaker-than-expected manufacturing PMI data, which refocused attention on the perilous state of the US economic recovery. The Kospi is the worst performer, down 2.1% while the Shanghai Composite, Nikkei 225 and Hang Seng are all down between 0.7% and 2.1%.

In Australia, the ASX 200 is currently 14% weaker at 4433, just above its session lows of 4428. Talk about “buy the rumour, sell the fact”. The Australian market fell for this old cliché big time yesterday with investors predictably moving onto the next tale of woe – the dismal state of the US economy, as confirmed again by last night’s much weaker-than-expected ISM manufacturing data.

Losses across the local market are broad based but predictably being led by the materials, financial and consumer discretionary sectors. It’s the combination of domestic and global factors that are weighing so heavily on the local market. Despite the fact that the Australian economy looks ‘relatively’ good, there are simply no buyers around. The perception of political risk and the high Australian dollar are seeing foreign investors look elsewhere. The weakness in home prices is weighing on already fragile consumer confidence, which has seen savings levels increase dramatically, in turn weighing on anything exposed to the end consumer like retail, domestic tourism etc etc.

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It’s a pretty ugly combination of events to be honest. The only thing keeping our heads above water is WA and Queensland, and from all reports, things aren’t as good as many believe they are over there either.

We firmly believe this is not the climate to raise interest rates, even if underlying inflation is starting to nudge the higher end of the RBA’s target band. It seems like the RBA has shown some restraint and just announced an ‘on hold’ decision. This has seen the AUD/USD fall about 60 pips to the 1.0930 level from 1.0975 beforehand. We think this is a very prudent decision given all the uncertainty across global markets. The coming months will give the RBA a much clearer picture as to whether or not CPI increases are transitory and where global growth is headed.

Offshore, judging by last night’s price action in the US participants are very concerned at the state of the US economy. The sharply weaker Manufacturing PMI numbers on top of last Friday’s huge downgrade to Q1 GDP have certainly got a lot of people seriously considering the prospects for a double dip recession. The worst thing is that Washington is just in the process of passing huge spending cuts, probably the exact opposite of what’s needed.

Ben Potter
Market Strategist
IG Markets


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