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IG Markets: Afternoon Thoughts 06/09/2011

IG Markets: Afternoon Thoughts 06/09/2011

Good afternoon,

Across Asia, regional markets are all under pressure following the huge falls seen in European markets overnight in absence of US trade. Falls among equities seem limited at the moment but further downside will hinge on what happens in Europe this evening and how US futures react to the panic. The Nikkei 225 is the worst performer, down 1.2% while the Hang Seng is 1% lower. In China, the Shanghai Composite is only 0.4% softer.

In Australia, the ASX 200 is currently 1.4% weaker at 4085, having earlier traded as low as 4072. As expected after the route on European bourses overnight the local market is seeing broad based losses with investors becoming increasingly concerned that European/US policy makers just can’t seem to find (or agree on) any sort of solution to their multitude of problems. With risk aversion the obvious theme of the day we are seeing the energy, industrials, consumer discretionary and materials sectors among the worst performers on the session.

The main focus today was the RBA interest rate decision a few minutes ago. Not surprisingly, they left interest rates on hold at 4.75%, with the accompanying statement pointing towards a neutral, wait and see approach.

As we’ve mentioned numerous times over recent weeks, the domestic market really is at the whim of global macro concerns. Whilst there are a number of domestic headwinds, namely the two speed economy and the perceived ineptitude of the government it the bigger issues out of the US and Europe that have sparked the recent volatility.

You hardly have to look hard to find negative headlines about the state of the global economy. That said, trying to find positives is actually quite difficult. We’ve heard a few comments recently suggesting commentators are being too bearish. Whilst there are always two sides to a coin, the situation global markets find themselves in at the moment is particularly bleak.

We’re always looking for where a positive catalyst may come from but at the moment it’s incredibly difficult to even suggest possible ideas. There’s a growing view that whilst the US is facing a growth problem, Europe is of more concern as it grapples with a solvency issue that is genuinely threatening five countries. The recent focus has been on how European banks would cope with sovereign defaults. Judging by the market’s reaction, it appears quite a few of the big banks aren’t sufficiently capitalised to survive a massive write-down in their sovereign holdings.

Worst of all, its increasing difficult to foresee a solution to this European mess. This issue has been dragging on for the best part of two years now. With 16 individual nations all pulling in different directions and managing their own self interests, it’s not hard to see why markets have little faith that a sustainable solution can be found by policy makers.


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