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IG Markets Afternoon Thoughts

IG Markets Afternoon Thoughts

Good afternoon,

Across Asia, regional markets are sharply lower, although well off morning lows as fear and panic continue to dominate investor psyche over fears of another recession in the US and debt contagion across the EU. The Kospi and Hang Seng are the worst performers, down 6.8% and 6.4% while the Nikkei 225 and Shanghai Composite are 3.5% and 1.1% weaker respectively.

In Australia, the ASX 200 is currently 0.5% higher at 4004, having risen sharply from its mid-morning lows of 3765. The obvious question now is does this bounce back continue over the course of the afternoon or will the market roll over again as it has so many times in the last few weeks. Fear and anxiety ruled the morning session with broad based capitulation giving way to some mild buying and serious short covering this afternoon. Financials, energy and materials are all now in positive territory.

We’re seeing a classic ‘short covering’ relief rally now as traders aggressively look to take profits on their short positions. The Australian market got crunched early morning as wave after wave of forced selling went through the market. Once that subsided, the combination of short covering and bargain hunting has seen a pretty amazing rally, some 4% from the lows.

Interestingly, however is that other markets have rallied nowhere near as much, with S&P 500 futures only up about 1% from the lows The other true reflection of safe haven demand, gold continues to power higher, just hitting US$1770.40/oz.

There seems to be some optimism coming through markets that Ben Bernanke might outline plans for a QE3 package this evening. Even if he does mention this, there will be a lot of speculation as to whether or not it will actually make much difference given the wildly divergent views as to the effectiveness of the previous packages.

Either way, the markets have been dreadfully oversold and at risk of a violent short covering rally. It appears we’re seeing this starting in Asia. However, the big question will be how long it lasts and how quickly traders look to sell aggressively into the rally.


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