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IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

FTSE 5629 -6
DAX 6768 -4
CAC 3286 -6
IBEX 6695 -43
DOW 13011 +2
NAS 2642 -1
S&P 1378 -1

Oil 87.90
Gold 1615

Across Asia, markets are mixed with focus briefly switching to growth concerns on the back of China’s manufacturing PMI numbers. Risk assets lost some ground after China's official July manufacturing PMI fell slightly to 50.1 from 50.2 in June. This fell short of market expectations of 50.4 resulting in a drop in the euro and Aussie dollar. Regional equity markets did not react as drastically and have remained quite resilient in the session. However, the price action in risk assets is showing that a bit of doubt is starting to creep in after the monster rally we have seen over the past week. Concerns over how aggressive the ECB will be in backing Mario Draghi’s pledge to save the euro seem to be keeping some investors at bay ahead of the ECB meeting. On the US front, a growing number of analysts now feel the Fed is far more likely to conduct further easing at the September meeting.

Looking at the equity markets in the region, Japan’s Nikkei is the weakest performer, with a 1.1% drop on the back of a stronger yen. USD/JPY printed a low of 77.91 this morning on the back of China’s manufacturing PMI and continues to look bearish. The ASX 200 is around 0.2% weaker, but the Shanghai Composite has surged 0.9% and the Hang Seng is relatively flat. US markets are facing a fairly flat start, while European markets are likely to open only mildly lower. We get the sense that this is the calm before the storm, with event risk set to ramp up later today. The growth story continues with Spanish and Italian manufacturing PMI, along with the final European manufacturing PMI numbers due out. We would not be surprised to see this data disappoint after the dismal numbers we have been receiving from the region. This would put further pressure on the euro, which is already facing downside risk, given the risk of disappointment from the ECB on Thursday in a market that is expecting Mr Draghi to formally endorse bond purchases in some form.

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Most market participants are expecting a reactivation of the Securities Markets Programme (SMP). Comments from German Finance Ministry and Bundesbank officials suggest that SMP reactivation is not a done deal, let alone the contentious issue of granting the ESM a banking license. Delaying easing until September would give the Fed two additional months of employment data to peruse, and the Jackson Hole conference at the end of August will provide Ben Bernanke with a timely opportunity to prepare the market for any easing decision. Apart from the Fed, investors should also look out for the ADP non-farm employment change and some PMI numbers in the US.
Locally, the ASX 200 maintained a fairly tight range today. There were not many big moves seen in the cyclical space. However, we saw flows into some of the defensive sectors, particularly the telecoms space. Telstra’s price action broke above $4 and continues to attract significant attention, particularly with its high yield heading into reporting season. The stock is now at its highest level since November 2008 and has experienced an impressive turnaround with a huge outperformance. With the stock breaking above $4, most short-term traders will now be lifting their targets on the stock to around $4.50. Resource names have been quite subdued today, with sentiment dampened by the weaker-than-expected China manufacturing PMI print.


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