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IG Markets Afternoon thoughts

IG Markets Afternoon thoughts

Across Asia, regional markets are mostly higher following the positive session on Wall Street on Friday. After being down significantly in early trade and following Ben Bernanke’s speech, US markets staged an impressive Friday afternoon rally that saw them all close firmly higher. The Kospi is the best performer, up 2.6% while the Hang Seng and Nikkei 225 are up 1.5% and 1.3% respectively. The Shanghai Composite is beating to the tune of its own drum, currently weaker by 1.1%.

Locally, the ASX 200 is 1.6% firmer at 4266.7 after trading as high as 4282.4 earlier this morning. We had expected a positive start to the new week but this degree of strength has surprised a few people. The gains are broad-based, although it’s a little bit unusual to see the typically defensive property trusts, utilities and healthcare sectors leading the way. When risk appetite improves, we would normally expect the market to be led higher by cyclical buying. Nonetheless, the big cyclical sectors are all up between 1.1% and 1.7%.

There’s a general consensus across global markets that we are going into a period of low returns, where yield will play an important role in determining the total return on a portfolio. This is probably the reason why we’re seeing money flow towards the more defensive names as they have higher and more sustainable yields when compared to cyclicals.

With the local earnings season nearly behind us, the market’s focus is going to quickly return to the global macro issues that have driven the recent volatility. It’s a huge week for US economic data with the likes of pending home sales, consumer confidence, ISM manufacturing PMI and employment reports all due. Signs of improvement should help markets while on the flipside, weaker data will certainly bring more volatility.

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We think it was a very smart speech from the Federal Reserve chairman on Friday night, in that he didn’t cave into the demands of financial markets, instead standing firm in his belief that the economy will show signs of improvement. Yet, at the same time he left the door slightly ajar should conditions worsen.

Judging by the market’s reaction, it looks like the ‘hopes’ the market had ahead of Friday’s speech have simply been pushed forward to the next FOMC meeting on September 22, especially given Ben Bernanke announced it would be extended by a day so that the board could fully discuss the options it has. Given the huge amount of data due in the coming weeks, the extra time between now and late-September will give the Fed a much better idea of where the economy is positioned.


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