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IG Markets - Afternoon thoughts Sept 4

FTSE 5747 -9
DAX 7015 0
CAC 3450 -4
IBEX 7428 -6
DOW 13108 +17
NAS 2779 +7
S&P 1409 +2

Oil 97.30
Gold 1695

Sentiment in the Asian session has been mixed with most of the equity markets weaker, though risk currencies are holding up fairly well. The euro has actually extended its gains, with EUR/USD printing a high of 1.2628. ECB President Mario Draghi stated that the purchase of ‘bonds with a maturity of up to three years would not be state financing’. Yields on two-year Italian, Spanish, and Portuguese debt each fell over 10 basis points in response. This has kept the euro well supported throughout Asian trade. However, it has been a different story for the Aussie dollar which continues to languish on deepening concerns about China and the mining sector (iron ore). AUD/USD printed a new low of 1.02233 this morning ahead of the RBA’s interest rate decision and recovered to 1.0241 post the decision. The RBA decided to keep interest rates on hold as expected and therefore we didn’t see any major moves following the announcement. The accompanying statement was also fairly unchanged but what was surprising were comments that there have been ‘very large increases in capital spending in the resources sector’. This sounds a little out-dated considering some of the recent announcements by BHP Billiton and Fortescue Metals. With this in mind, the doves will be hoping to see this part of the statement revised next month.

Looking at the equities in the region, Hong Kong’s Hang Seng and the Shanghai Composite are each around 0.4% weaker. Japan’s Nikkei is down around 0.2% and the ASX 200 has extended its losses to 0.7%. After all the euphoria surrounding stimulus action by central banks, it seems some investors are now in a wait and see mode. European markets are facing a relatively flat open, while US markets are facing mild gains after having missed out on yesterday’s. On the economic front, we have Spanish unemployment change and European PPI due out. Over in the US, we have ISM manufacturing PMI, construction spending and total vehicle sales.

The comments by Mr Draghi in a closed hearing at the European Parliament on Monday came ahead of the ECB's monthly policy meeting this Thursday. That meeting has markets waiting for further details on how the bank could help bring down the funding costs of countries such as Spain and Italy to prevent them from having to seek full eurozone bailouts. It seems the euro's reaction at the ECB's press conference on Thursday will be largely determined by the range of tenors which are declared eligible for purchase under the new programme. Mr Draghi has previously made it clear that only the short-end of the curve would be targeted, but this still leaves plenty of room for interpretation. Clearly, the further out along the curve the ECB goes, the more the euro will benefit.

After opening a touch higher, the local market swiftly gave up the early gains and ventured deeper into negative territory as the session progressed. One of the major turning points of the session was comments from iron ore miner Fortescue Metals. The world's fourth largest iron ore producer, said on Tuesday it is slowing an aggressive expansion of mines in Australia by slashing spending and cutting jobs, as a cooling Chinese economy hits prices for industrial commodities. The comments saw the miner sold off and it is currently around 2% weaker, while its peers BHP Billiton and Rio Tinto trade higher. Gold miners have remained well bid with gold prices approaching US$1700. St Barbara (+4.3%), OceanaGold (+3.6%) and Kingsgate (+2.4%) are all enjoying a day in the sun.

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