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IG Markets - Afternoon thoughts August 7

FTSE 5809 0
DAX 6919 0
CAC 3396 -6
IBEX 7025 -29
DOW 13128 +10
NAS 2698 +4
S&P 1394 0

Oil 91.93
Gold 1612

Across Asia, markets are firmer as risk sentiment remains fairly resilient while investors hoped that Spain would request a full EU/IMF bailout. This clears the way for the ECB to buy Spanish bonds in the secondary market. Helping sentiment was Angela Merkel’s government backing of the ECB’s bond-buying plan announced last week. Although many analysts believe that Spain's request for the EU's aid is all but inevitable, there is no indication that such a request is imminent. The Spanish government maintained that it needs to see the details of the assistance programme both from the EFSF and the ECB before making a formal request.

Looking at the equity markets in the region, Japan’s Nikkei is 0.7% higher, the Hang Seng has added 0.3% and the ASX 200 has risen 0.4%. The Nikkei is trading near a three-week high, with the exporters having a good session. The Hang Seng and ASX 200 are both trading at around three-month highs as German support for the ECB’s bond-buying plan overshadowed concerns that slowing economic expansion in China will hurt profit growth. We have not seen any big moves in US futures today. As a result, US and European markets are facing a relatively flat to mildly higher start.

Despite the improvement we are seeing in sentiment, it is clear that the structural problems of the eurozone are still far from getting resolved, as the EU leaders focus on temporary measures to gain more time. A report from the IMF on Monday urging the eurozone nations to take bigger haircuts on their Greek loans to make Greece's debt ’sustainable‘ is evidence of the impending problems in the common currency region. Later today we have Italian industrial production and GDP. We also have German factory orders and Fed chief Ben Bernanke is scheduled to speak.

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Locally, the ASX 200 has broken through near-term resistance at 4288 today, with most of the strength coming from resource names. This was a result of a fairly strong night for commodities. The local index is now a touch below 4300 and last traded above this level on 14 May. Today’s gains came despite most reporting companies disappointing. Some of the major reports were from Cochlear (-5.2%), Leighton Holdings (-1.8%), Bradken (+8.3%) and Transurban (-1.8%). From the share price moves, it is fairly easy to tell which ones disappointed and which impressed. Reporting tomorrow we have Rio Tinto, Computershare and Stockland. As expected, the RBA kept the official rate on hold at 3.5% and said that it is too soon to gauge the impact of earlier policy moves. With global growth remaining subdued, the RBA seems relatively comfortable with where the Australian economy currently is. With the local policy setting statement staying put and easing still likely in the US, the Aussie dollar’s yield advantage looks like it will only increase. AUD/USD spiked above 1.06 following the announcement. Near term resistance for the pair is at 1.0637.

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