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IG Markets Afternoon thoughts 8th August 2011

Across Asia, regional stock markets are under huge selling pressure following the weekend downgrade to the US’s credit rating. S&P cut it from AAA to AA+, which saw panic selling across markets as they reopened this morning. The Hang Seng is the worst performer, down 4.4% while the Kospi, Shanghai Composite and Nikkei 225 are all down between 2.3% and 3.9%.

In Australia, the ASX 200 is currently 27% weaker at 3995, the lows of the session. Today’s price action has been a direct reaction (some would say, overreaction) to S&P’s weekend downgrading of the US credit rating to AA+ from AAA. There has definitely been an element of “sell first, ask questions later” in today’s trading behaviour - no one really wants to wait around and see how the US market reacts tonight.

As expected, losses on the local market are broad based with sellers indiscriminate as they rush to build cash reserves ahead of what is likely to be a volatile period. Calming words from the ECB, or the Fed Reserve or a decisive policy response is what the market most yearns for at the moment.

Markets did manage to post some sort of relief rally for most of the morning. However, it was short-lived as traders quickly sold into the strength, using the bounce as a means to sell stock at a higher price. With markets bereft of any confidence, no one believes anything until we see how the US trades tonight in response to the weekend credit downgrade.

Opinion is sharply divided on what the actual affect will be; some believe borrowing costs are set to rise by as much as 75 basis points across the board while others don’t see any real impact from the downgrade. It really will be a wait and see approach to this one; we’re expecting a very volatile session in the US tonight, which will be absolutely crucial to determining tomorrow’s trade.

Ben Potter
Market Strategist
IG Markets


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