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IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

FTSE 5827 -38
DAX 6944 -30
CAC 3435 -15
IBEX 7084 -41
DOW 13129 -43
NAS 2721 -7
S&P 1400 -4

Oil 93.14
Gold 1601

Across Asia, markets are weaker as investors start to price out the probability of QE in September following the economic data released in Europe and the US. In the European session, risk assets were supported by better-than-expected Q2 GDP data from Germany, France, and the Netherlands. EUR/USD relinquished its early gains following the weak German ZEW survey economic sentiment index, which fell to -25.5 (consensus -19.3). In the US session, the greenback was buoyed by a strong retail sales reading, resulting in risk assets giving up some of their early gains. US retail sales grew by 0.8% month-on-month in July, the first gain in four months, beating expectations of a 0.3% increase. This helped to lower market expectations of another Fed QE programme.

Japan’s Nikkei is down 0.4% despite a weaker yen supporting some of the exporters. USD/JPY finally broke out of its recent trading range helped along by better-than-expected US retail sales data which resulted in a sharp spike in US treasury yields. Hong Kong’s Hang Seng has shed 1.2%, the Shanghai Composite is 0.8% lower and the ASX 200 has lost 0.5%. European markets look set to give back a modest portion of yesterday’s gains as Asia pulls back. One wonders where markets would be if central banks were not putting a floor under risk assets, although at the same time the move we have seen in US ten-year treasury of late looks as though the QE3 trade is slowly being unwound, ultimately being replaced by signs that US data of late has been encouraging.

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We will continue to monitor US data knowing that every piece of information that comes out better-than-forecast lowers the probability of QE3 and therefore will be USD positive and a mild headwind for equities. On the billing today in the US we get reads on CPI, empire manufacturing and industrial production. European event risk comes alive in September and surely we will have a clearer picture by early October on Greece’s debt position or future involvement in the EMU, and whether Spain and (less deservingly so) Italy will sacrifice a probable loss of sovereignty to achieve lower borrowing costs. Still, clarity needs to be restored, and until September it’s hard to see anything other than a continuation of the range-trading we are currently seeing, with the S&P for example trading between 1394 and 1410 (around 1%) in the last seven sessions.

Locally, the ASX 200 pushed higher earlier only to be dragged lower by resource names as the session progressed. OZ Minerals (OZL) has been the most notable decliner in the resource space, plunging over 8% on the back of its first-half report. Although OZL managed to post a 4.9% rise in profit, the drop in dividends to 10 cents a share unfranked and rising costs have spooked investors. With finance for projects increasingly difficult to come across, we could see an increasing number of miners holding on to capital. The biggest report of the day was Commonwealth Bank (CBA) which has risen 0.7% and is outperforming its peers after declaring a fully-franked final dividend of $1.97 per share, up 5% on year. CBA goes ex-div on Monday and we are likely to see some positioning ahead of this. Tomorrow is a busy day of reporting with AMP Limited, ASX, Brambles and Alumina some of the key ones to look out for.


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