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IG Markets afternoon thoughts

IG Markets afternoon thoughts

Across Asia, regional markets are all higher following the huge relief rally seen in US markets overnight. The short-covering rally was further boosted by comments from Federal Reserve chairman Ben Bernanke that they would keep interest rates on hold for at least the next two years. The Hang Seng is the best performer, up 3.2% while the Shanghai Composite, Nikkei 225 and Kospi are all up between 0.7% and 1.9%.

In Australia, the ASX 200 is currently 26% firmer at 4137, just off its session highs of 4162. The late overnight surge on Wall Street has been enough of a catalyst to see local investors resume their buying which kicked off around noon yesterday with the local market now about 10.3% off its lows. Gains for the day are broad based with all major sector indices in positive territory. The biggest percentage advancers are the materials, energy and financial sectors which are all higher by more than 3%.

As is nearly always the case after big short covering/relief rallies, we’ve had plenty of people asking whether this is the bottom. Whilst we could have seen a low, experience would tell us that one bounce doesn’t miraculously solve all the original problems the world was worried about.

In fact, since midday yesterday when the market started its incredible reversal, very little has actually changed. Yes, Ben Bernanke said interest rates will be at record lows for at least the next two years but did anyone actually really think they were going to go up anytime soon anyway? I highly doubt it. The Federal Reserve’s assessment of the economy was actually very down beat, saying that growth had been slower than expected and that it was likely to continue that way.

They also largely confirmed that their ‘gun was out of bullets’, referring to their ability to stimulate the economy further. The comments from the Fed were well short of what the market had been hoping for, but it was all the chairman could do as three of the ten-man board dissented. In short, the Federal Reserve basically confirmed that the US economy is slowing significantly, but at the same time suggested markets had to learn to stand on their own two feet.

So the reasons behind the recent turmoil – slowing US growth and European debt contagion are still present. Our view is that yesterday’s rally was nothing more than a very aggressive short covering rally; if you stretch the rubber band enough one way, it will eventually snap back hard in the opposite direction.

ENDS

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