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IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

FTSE 5723 +10
DAX 6776 +22
CAC 3333 +11
IBEX 6737 +17
DOW 12999 +28
NAS 2635 0
S&P 1377 +2

Oil 88.85
Gold 1601

Across Asia, most markets are mixed with a degree of caution being exercised ahead of the much-anticipated ECB meeting. In US trade we saw US dollar bulls reassert themselves, with the greenback gaining ground against most of the major crosses. The Fed pledged to provide additional stimulus but disappointed investors hoping for a more definitive sign of further monetary easing. Going into the Asian session, risk currencies had fallen sharply against the greenback. EUR/USD fell through 1.23 to a low of 1.2218, while AUD/USD descended from 1.052 to 1.04359. However, we have seen a slight recovery in risk currencies through the Asian session. Perhaps the sellers are getting nervous ahead of the ECB meeting which is expected to yield a positive outcome.

Looking at the equity markets in the region, Japan’s Nikkei is the best performer, rising 0.3% on the back of a weaker yen. There was sizeable USD/JPY demand with a sharp rally from 78.10 to 78.55. Japanese officials will be cheering the move after talk around intervention had ramped up in recent days as the pair approached 77.50. The ASX 200 is around 0.2% firmer, but the Shanghai Composite has lost 0.3% and the Hang Seng has slumped 0.7%. European markets are likely to open higher with futures pointing towards some mild gains. With the Fed seemingly disappointing those who were looking for more, the focus of the market sharply turns to the ECB and price action will largely be dictated to by risk appetite. For a further acceleration in risk assets, we will need to see the ECB come out guns blazing and initiate a two-pronged approach to bond buying, which has been speculated about in certain German publications. Many believe we will see the ECB reactivate its dormant SMP programme, while also using the ESM (European Stability Mechanism) to purchase sovereign debt potentially in future auctions.

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These actions would be positive, but for the market to feel really optimistic we would need to see these policies have the blessing of Germany, something which in recent days is clearly not going to happen. Legislation also dictates that any bond buying using funds from the ESM or EFSF can only happen after Spain applies for a bailout, an event that carries a lot of negative stigma. It is certainly going to be an interesting session and bulls will be hoping to see the ECB show it will do what it takes to defend the euro. Despite the relative stability we are seeing in the Asian session, there is still a strong case for the bears. Expectations for the upcoming ECB meeting have been raised to the point where the scope for disappointment is high.

Locally, the ASX 200 has held its ground and is currently a touch higher after a slightly negative open. Investors had some positive economic data to work with today. The trade balance showed a surprise surplus, while retail sales data beat expectations. However, this has not had much of an impact on equities. Most of the retailers are actually trading lower today. Aquarius Platinum was one of the worst performers today, dropping 14% after an incident at its Kwezi shaft. In sharp contrast, the big resource names had a good day with Fortescue Metals rising around 4%, while Rio Tinto and BHP climbed around 1% each.



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