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IG Markets - Afternoon thoughts August 23

FTSE 5805 +31
DAX 7074 +56
CAC 3489 +27
IBEX 7395 +54
DOW 13214 +41
NAS 2789 +6
S&P 1419 +6

Oil 98.73
Gold 1663

Across Asia, markets got off to a strong start as risk assets repriced QE expectations. Risk assets rallied towards the end of the US session after the minutes of the last FOMC meeting were more dovish than the market expected. This triggered a broad-based USD sell-off and lifted risk currencies and commodities. Committee members considered several policy tools to provide additional monetary stimulus, including ‘a new large-scale asset purchase programme’ and an extension of the rate guidance beyond 2014. As a result, it seems the minutes have heightened QE expectations heading into the Jackson Hole symposium on August 31. AUD/USD has been the most volatile pair today charging to a high of 1.0545 before a sharp reversal lower (to 1.05) on the back of a disappointing read for China’s HSBC Flash PMI data. EUR/USD has been quite steady through the Asian session and is holding its ground above 1.25.

China’s HSBC Flash PMI came in at 47.8, its worst level in nine months. The dismal reading saw the early rally in the Asian region stall, but most of the key indices are still in positive territory. The hang Seng has risen 0.9%, the Nikkei has climbed 0.2% and the ASX 200 has added 0.1%. A slump in USD/JPY has resulted in subdued trading for Japan equities today. The yen strengthened after minutes from a Federal Reserve meeting showed policy makers favoured adding stimulus unless the world’s biggest economy shows signs of sustained growth. European markets are set to open higher despite futures temporarily paring gains on the back of a disappointing read for China’s HSBC flash PMI data. US markets are also facing a firmer open as market participants continue to focus on the FOMC minutes. Today brings us flash PMIs in the US and various eurozone countries. Additionally we have US new home sales and this is bound to be closely watched in the wake of the FOMC minutes.

The FOMC minutes put Europe on the back burner, but there were still some developments, particularly on the Greece end. Greek Prime Minister Antonis Samaras made his case for giving more time to Greece to reach its reform targets by noting that the country will deliver on reforms and will submit a €11.5 billion austerity plan within weeks. He added that he ‘personally guarantees’ repayment of the rescue funds. After a meeting with Mr Samaras, Eurogroup head Jean-Claude Juncker said he is convinced that the Greek government will take all the necessary measures, but added that any extension of the deadline to meet deficit targets is contingent on the Troika report, which is due in late September. German Chancellor Angela Merkel is scheduled to meet Mr Samaras later today and this might be a source of volatility for the euro.

There was plenty of volatility for the local market today with an initial charge higher to 4403.9 stalling on the back of China’s HSBC flash PMI reading. Mining giant BHP charged higher as local investors warmed to its earnings report from yesterday. It was a big day on the earnings front with most of the reporting companies actually impressing. Fortescue Metals (FMG) was one of the main ones of the day and the stock has risen 1%. FMG’s full-year profit rose 53% to a record US$1.56 billion, meeting expectations of around US$1.55 billion, after increasing output to supply steel mills in China. Other big movers following earnings reports were Qantas (+3.4%), QR National (+1.5%), Fairfax (-9.5%) and Origin (-5.8%). Gold miners have also enjoyed a day in the sun as the gold price starts to reprice QE expectations, with Newcrest Mining surging over 3%. Reporting tomorrow we have Billabong, Atlas Iron and Woolworths.

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