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IG Markets - Afternoon Thoughts

Good afternoon,

FTSE 5798 -43
DAX 6960 -8
CAC 3449 -4
IBEX 7204 -7
DOW 13145 -24
NAS 2715 -2
S&P 1398 -3

Oil 93.24
Gold 1609

Across Asia, markets are mostly firmer with some of the majors in the region breaking to new highs. Risk sentiment has remained resilient following stronger-than-expected US July payrolls and hints from Spain's Prime Minister Rajoy that he's willing, at last, to consider applying for full assistance from the EU. Sentiment was also somewhat supported by dovish comments from Boston Fed President Eric Rosengren, who called for ‘a much more accommodative policy’. Fed Chairman Ben Bernanke, in his prepared statement, did not discuss monetary policy. However, he noted that the US economy is still in a ‘fragile recovery’ phase, but is ‘well placed’ for the future. The euro has remained fairly sidelined through Asian trade, while the Aussie dollar has struggled with AUD/USD printing a low of 1.0532.

Looking at the equity markets in the region, Japan’s Nikkei is 1.5% higher and is leading the gains in the region. Japan posted a bigger-than-expected current account surplus for June, boosting exporters. Meanwhile, the BoJ's two-day meeting commenced today and the bank is widely expected to keep its policy effectively unchanged. The ASX 200 is up 0.5% after printing a three-month high, but markets in China are struggling with the Hang Seng and Shanghai Composite both a touch weaker. Tomorrow is a big day for China, with CPI expected to show a 1.7% increase in July from a year earlier, the least since January 2010. Such a moderation in inflation would provide more room for monetary policy easing. European markets are facing a mildly weaker open with some consolidation likely after having rallied so far this week.

It is quite surprising to see Asian markets remaining quite strong, while futures suggest European and US markets are set for a weaker open. Investors are digesting the disappointing eurozone data and Greece’s ratings change. German factory orders contracted by 1.7% month-on-month in June, well below market expectations Italian industrial production fell by 8.2% year-on-year (y/y) in June, and GDP showed a 2.5% y/y contraction in Q2. S&P affirmed Greece's rating at CCC, but revised its outlook from 'stable' to 'negative'. S&P projections indicate Greece's GDP contracting by 10% to 11% cumulatively during 2012 to 2013, in contrast to the 4% to 5% contraction that the EU/IMF projected Later today we have German and French trade balance figures as well as a German 10-year bond auction.

Locally, the ASX 200 opened the session above 4300 and went to print a high of 4323.8. The last time the local market traded that high was on 8 May. Leading the gains today was Computershare whose shares rallied 6% after FY12 EPS of $0.49 beat consensus by 2%. The company also forecast a 10% to 15% improvement in FY13 earnings owing to contributions from recent acquisitions. On the losing end was Telstra which shed 2.3% hurt, by news that the cost of building the NBN has risen by 3.9% to $37.3 billion and ahead of its results tomorrow. TLS is expected to post FY NPAT of around (+9.7%) $3.55 billion and EBITDA (+2.2%) to $10.38 billion. Cost control will be key for FY13 as well as an expected 14 cents per share dividend. Cyclicals were generally strong today with some good gains in the mining, energy and financial space. Focus now switches to Rio Tinto’s results which are due out this afternoon.

Kind regards,
Stan Shamu
Market Strategist
IG Markets


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