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IG Markets - Afternoon thoughts August 22

FTSE 5817 -41
DAX 7047 -42
CAC 3492 -21
IBEX 7486 -59
DOW 13195 -9
NAS 2769 -3
S&P 1411 -2

Oil 97.62
Gold 1639

Across Asia, markets are mostly weaker on the back of the bearish intraday reversal on Wall Street. After a fairly risk-on European session yesterday, sentiment switched late in US trade with most risk assets retreating. Risk assets were well supported through the European session by positive commentary from eurozone officials. The German member of the ECB's Executive Board, Jorg Asmussen, signalled full support to Mario Draghi's bond-buying programme, noting that purchases may be ‘unlimited’ in scale to price out the ‘convertibility risk’ of a eurozone break-up. Mr Asmussen's support was a shot in the arm to the ECB's bond-buying programme, which was earlier criticised by the German Bundesbank. The euro was bid across the board, with EUR/USD charging to a high of 1249 (from around 1.236). The pair even held steady at those high levels despite a dip in sentiment towards the end of the US session. Also of note were Atlanta Fed President, Dennis Lockhart’s comments. He cautioned against employing monetary policy ‘too aggressively’ to address economic problems that can be resolved only by fiscal reforms.

The euro and other risk currencies have held pretty steady through the Asian session, but we can’t say the same for other risk currencies, particularly the Aussie dollar. AUD/USD extended its losses from the US session and traded as low as 1.0438 from overnight highs of around 1.052. Looking at the equity markets in the region, the Nikkei has declined 0.3%, the Hang Seng is 0.8% lower and the ASX 200 is down 0.3%. The Nikkei is being weighed by a wider-than-expected trade deficit in July as Europe’s debt crisis and a strong yen dampened demand. European markets look to be heading sharply lower on the open after Apple’s reversal caused a failed breakout on the S&P. With European bourses approaching key resistance levels (notably the IBEX which struggled to break the July downtrend at 7620 on Tuesday), we would not be wholly surprised to see equities come under some modest downside in the short-term. On the data front, the FOMC minutes are released after the European closing bell, although while you can never dismiss an event like this, they have lost a certain amount of relevance given they don’t reflect the recent non-farm payrolls, retails sales and better housing data.

Europe continues to price in more favourable terms for Greece and action from the central bank. While everyone seems to be singing from the same song sheet, with the exception of the Bundesbank, the market now waits to hear any rhetoric from Jean-Claude Junker’s outing to Greece and the François Hollande/Angela Merkel, Angela Merkel/ Antonis Samaras meetings over the coming days. Clearly they are not going to provide enough colour to fully satisfy, however it will set the stage for the September ECB meeting and EU summit, when we will need to hear details on the full conditionality Spain must adhere to to warrant ECB/ESM/EFSF assistance. It does seem the market is viewing this sequence of events with a glass half full mindset, thus we would expect buyers in EUR/USD on dips to around 1.2444 in the short term, with a potential second consecutive close above the 55-day moving average a clear positive development for the pair.

The local market has been relatively flat all day with a slight downside bias. Unlike previous sessions, the market did not have the luxury of some really positive earnings reports to support it. There were some disappointing reports from majors like Woodside (-3.6%) and AGL Energy (-0.8%), which offset some positive reports from the likes of Suncorp (+3.3%) and CSL Limited (+2.1%). Heavyweight miner BHP kicks off the upcoming event risk with underlying NPAT expected to print $16.875 billion, a fall of 22% on the year. Clearly there is more to focus on with this name such as projected capex, a potential fall in free cashflow, further impairment charges and a rise in net debt. However, as always we will be keen to hear how Mr Kloppers judges the company’s earnings visibility. There seems to be growing pressure on the group’s CEO, so clearly he would love to see China stabilise in FY13. Speculation that the miner won’t proceed with the Olympic Dam expansion has seen its shares trade higher in the afternoon session. We have a big day of reporting tomorrow with Fortescue Metals, Fairfax, Qantas, Iluka, and QR National being some of the main ones on the calendar. Of course we also can’t forget tomorrows China HSBC China flash PMI release.

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