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IG Markets Afternoon thoughts

Across Asia, regional markets are mixed despite the positive overnight leads from European and US markets. However, the rebound in stocks across the region lost momentum as profit takers moved in ahead of key events this evening that includes Fed Chairman Ben Bernanke and President Obama’s speeches. The Hang Seng and Shanghai Composite are down 0.7% and 0.2% respectively while the Nikkei 225 and Kospi are 0.1% and 0.3% firmer.

In Australia, the ASX 200 is currently 0.2% weaker at 4178, well below its early morning highs of 4218. Despite a highly positive session for European and US bourses, the local market has been unable to sustain yesterday’s momentum with a much weak-than-expected employment report being the catalyst for the market to turn south. On a sector by sector basis the market is mixed with modest gains across the energy and industrial sectors being more than offset by losses in the materials, financial and consumer sectors.

We’ve seen a lot of traders looking to book profits today given the recent bounce in equities and especially ahead of a huge night in data and speeches this evening. The worse-than-expected jobs data saw that selling accelerate, although it wouldn’t have surprised us if it had spurred some buying as it goes a long way in cementing the view that the next move for Australian interest rates is lower.

The market has rallied in anticipation of tonight’s jobs creation plan from President Obama and it now looks like traders using that strength to exit longs and sideline themselves ahead of tonight’s events.

A lot of participants are questioning whether or not tonight’s plan will actually have any meaningful affect in terms of creating jobs. There’s a lot of scepticism as everyone remembers the infrastructure spending plan during the GFC which, at the end of the day did very little. Everyone thinks this is going to be the magic pill but we have grave reservations; circa US$120 billion to maintain the current payroll tax reduction isn’t anything new, it’s just an extension of where people are positioned right now.

And proposed infrastructure spending of around US$100b, or 1% – 1.5% of US GDP; it will help but is it meaningfully going to reduce the unemployment rate? We don’t think so; the US economy needs to be creating approximately 400,000 jobs per month before it starts making inroads into the unemployment rate.

Either way, it’s certainly going to be an interesting night as traders firstly focus on interest rate decisions from the Bank of England and ECB. From there, it will be over to the Mr Bernanke and Obama show.

Ben Potter
Market Strategist
IG Markets


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