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IG Markets - Afternoon thoughts August 24

FTSE 5768 -9
DAX 6937 -13
CAC 3421 -12
IBEX 7240 -43
DOW 13062 +5
NAS 2763 +1
S&P 1402 0

Oil 95.69
Gold 1667

Asia won’t have done too much to inspire European traders, with a negative bias seen across the region, notably in China where the Shanghai Composite looks set to have a second crack in a week at closing below the July 31 pivot low of 2100. Clearly China is a source of concern for the market and the Dallas Fed added fuel to the fire, highlighting electricity consumption continues to decline sharply. However perhaps just as concerning is the price of iron ore, which has cracked the $100 per tonne level for the first since December 2009. There is speculation among the cynics that the Chinese themselves are surpassing the price, effectively trying to engineer more favourable terms with the big miners in upcoming contract negotiations. EUR/USD continues to do absolutely nothing in the Asian trading session in a 15 point range, with traders continuing to question how September will map out for both sides of the currency equation with regards to Spain and Greece and the potential actions/inactions of the Fed. US futures are flat despite the falls in regional equities and other risk assets like oil and copper.

Wednesday’s failed break of the April highs continues to affect traders’ psyches, with many suggesting after a near 13% rally on the S&P from the June 4 lows that the markets are discounting a lot of good news, so clearly a pullback would be healthy. A pullback would also be welcomed by many money managers who failed to take part in the recent move and at some stage will need to tell clients of the underperformance; given that only 11% are outperforming the index at present, the fear of missing out remains one of the key factors that could drive equities higher, providing of course that September goes according to plan. European markets look set to see modest downside and the focus clearly turns to the meeting between Angela Merkel, François Hollande and Antonis Samaras, where it seems the French and German leaders will try and coordinate a response and encourage the Greeks to pursue pre-agreed targets.

For now, the dominant theme continues to be US dollar weakness and gold is back to being the preferred destination. The greenback is likely to continue trading softly into the next Fed meeting on September 12-13. Although the Fed is still unlikely to announce further easing (based on the stale August 1 minutes), the perceived risk of renewed QE is likely to keep the dollar on the defensive for now. Gold charged to US$1770 on QE prospects and the shiny metal is now up for a seventh consecutive session. Local gold miners have actually outperformed today with Newcrest Mining rising 0.7% and Medusa Mining adding 0.9%.

The local market has had a soft day, with the index currently down 0.8%. At current levels, we are down around half a per cent for the week after testing that 4400 level a couple of times. Today hasn’t been quite as big a day on the earnings front as yesterday, but we have seen some big moves none the less. Woolworths has recovered from its lows after reporting its net income fell 14% to $1.82 billion, around 9% below analyst estimates of $2.02 billion. The supermarket giant took a $420 million charge to restructure its Dick Smith electronics chain. WOW will sell Dick Smith and concentrate on supermarket war with Coles. Fairfax shares took a bath again today, dropping over 10% on reports Gina Rinehart failed to sell a 5% stake. Its CEO said the company is in a perfect storm of structural change and cyclical downturn. There were also some big moves following a number of broker changes with Fortescue being one of the main culprits. FMG dropped nearly 6% after a downgrade by Nomura and a slip in iron ore prices.

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