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IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

FTSE 5723 -21
DAX 6975 -36
CAC 3398 -16
IBEX 7245 -61
DOW 13048 -59
NAS 2774 -10
S&P 1403 -7

Oil 95.00
Gold 1657

Asian markets have slumped as improving US economic data damped speculation the Federal Reserve will take immediate action to spur growth. July pending home sales rose 2.4% month-on-month (m/m) and 15.0% year-on-year (y/y), beating consensus forecasts for 1.0% m/m and 11.1% y/y, respectively. Q2 real GDP growth was revised up to 1.7%, as expected. As a result, the US dollar found some support and marginally gained ground in most major crosses. Judging sentiment from a risk currencies perspective, AUD/USD has remained vulnerable in the Asian session, briefly dropping below 1.032, while EUR/USD has found some stability after having slipped in US trade. With the Jackson Hole symposium commencing later today, we are likely to continue seeing some positioning in the risk space.

Although regional equity markets are weaker, market participants have finally seen a move out of the recent tight ranges we’ve witnessed for most of the week. The ASX 200 has dropped 1% with the materials and industrials experiencing some steep losses. Japan’s Nikkei has descended 1.1% and Hong Kong’s Hang Seng has declined 1.3%. Japanese retail sales (-0.8%) came in worse than expected, while developers weigh on the Hang Seng on a report Hong Kong may act to cool the property market. In light of the weakness we are seeing in the Asian session, US and European markets are facing losses at the open. There is quite a bit of data to look out for with the German unemployment change and European retail PMI due out. There is also an Italian 10-year bond auction which deserves some attention. In the US, we have unemployment claims as the highlight ahead of the Jackson Hole symposium.

Despite all the meetings that have taken place among European leaders this week, we have not received any definitive comments on dealing with the crisis. Leaders continue to sit on the fence so to speak. German Chancellor Angela Merkel met with Italian Prime Mario Minister Monti on Wednesday. Ms Merkel expressed confidence that the reform programme undertaken by Mr Monti's government will help lower the sovereign yield spreads between Italy and Germany. While Ms Merkel maintained her stance that EU treaties do not allow granting a banking license to the ESM, Mr Monti noted that this could be one of the options and the treaties could be modified to deal with the current crisis. September and October promise to be two of the busiest months in terms of eurozone policymaking that the crisis has seen so far. Things to watch out for in this timeframe include the September 6 ECB press conference, the German constitutional court decision, Greece's Troika programme, a potential request by Spain for EFSF/ECB bond buying assistance, and another EU summit. After ECB President Mario Draghi failed to give details of the bond-buying programme in the last meeting, there are fears that the prospect of another ECB press conference lacking in specifics could weigh on the euro.

The local market breached its recent trading range of around 4350 today. Once again, the miners were the main culprits of the day, with big falls for BHP Billiton (-2.4%), Rio Tinto (-4.2%) and Newcrest Mining (-5.1%). After a poor night in the commodities space, particularly the iron ore price, some of these moves were not too surprising. On the reporting front, Boart Longyear was perhaps the biggest surprise with the stock plunging 34% on the back of weak 2012 earnings guidance accompanying its half-year earnings report. The effects of this were felt throughout the industrials space as Monadelphous Group (-4.2%) and Leighton Holdings (-4.1%) also struggled. With risk off the table, investors were happy to park their funds in the defensive space and this lifted the healthcare and telecoms sectors.


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