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IG Markets - Afternoon Thoughts

Good afternoon,

FTSE 5301 +35
DAX 6333 +47
CAC 3024 +21

DOW 12448 -33
NAS 2533 -14
S&P 1314 -5

Oil 90.28
Gold 1558

Across Asia, markets are weaker on some disappointing data from China and continuing uncertainty over Europe. However, all things considered, Asian markets haven’t reacted too badly to either the summit or the deterioration in the China HSBC PMI data, which fell for a seventh month. The country’s growth issues have been a point of focus for a while now, and there has been talk that China will announce some growth measure soon enough, particularly after Premier Wen Jiabao’s comments over the weekend This could be one of the reasons why regional markets didn’t react too badly to the worsening China manufacturing activity. The Shanghai Composite is down 0.3%, while Hong Kong’s Hang Seng is 0.6% lower. Elsewhere in the region, Japan’s Nikkei has shed 0.5% and the ASX 200 has lost 0.3%.

It does feel that something big is bubbling away in the background that will change the course of Europe forever; perhaps we will know more in a month, perhaps six months or even a year. However, it does feel that something is going to need to happen to install a huge amount of confidence, or it will be lost in a massive way. This can be seen front and centre in EUR/USD, where yesterday’s break through the year’s low was met with such little resistance that a move to 1.2150 (late June lows) we feel should be on the cards. Still, even with this dark shadow hanging over the capital markets, European equities should open with gains ranging from 0.8% to 1.1%, as they price in the late session rally on the S&P. Consequently, US markets are facing mild losses at the open after having run up into the close. Ahead today, data flow is with UK GDP expected to be unchanged from the previous reading, European PMIs (aggregate) are expected to expand marginally to 46, while the IFO business surveys will get quite a bit of focus too. US durable goods and jobless claims are also worthy of note.

The EU summit came and went without incident, with all the key players getting their points across. Angela Merkel and Mr Hollande ran with the same rhetoric the market has been hearing for the last few days, hence the lack of reaction in EUR/USD or US futures. Perhaps, also Mr Junker’s comments that the discussions on eurobonds were ‘not unheated’ were the most confusing, given we are not sure he meant to use a double negative. Still, some pretty serious ideas have been thrust into the public forum in recent times, and that is how it generally works in Europe; give the market a taste and see what works. Once again, the huge divide in ideas on how best to deal with its issues shows how reactive the Union is, as leaders once again push the focus onto another ‘key date’; the June 28 and 29 summit now controls the lime light, just under two weeks after the Greek referendum on the EMU (as it seems to be shaping up). The waiting game continues, but until then the volatility experienced in European and US trade could well be on the cards for some time.

The local market actually got off to a fairly positive start after picking up on the momentum from the US session. Unfortunately, the lack of confidence just kept the buyers at bay and the local index just failed to hang on to the early gains. The ASX 200 is once again about to test some key support levels with the 4050 zone in focus after having halted last week’s selloff (and the December 2011 selloff). However, with the volatility we have seen recently, it wouldn’t be surprising to see some of these ‘significant levels’ disregarded. The resources got off to a fairly good start, with BHP Billiton helping to underpin the materials sector in the morning session. Although BHP is still up for the day (+0.3%), the materials sector is now weaker as the other big miners trade lower. Sundance Resources has been a standout for in the mining space, rising over 6% after finally making progress on the Hanlong merger. The stock is still trading well below the $0.57 cash per share offer. Some of the defensive sectors have held up yet again today, with consumer staples and healthcare sectors in positive territory. In the healthcare space, CSL Limited has risen 1.4%, while Woolworths (+0.9%) is underpinning the consumer staples.

Kind regards,
Stan Shamu
Market Strategist
IG Markets


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