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IG Markets - Afternoon thoughts Sept 7

FTSE 5781 +4
DAX 7170 +3
CAC 3410 0
IBEX 7900 +38
DOW 13291 -1
NAS 2827 -3
S&P 1433 +1

Oil 95.12
Gold 1692

Asian markets have rallied on the back of the ECB’s bond purchasing plan. Risk assets rallied after ECB President Mario Draghi announced the modalities of the ECB's new bond-buying programme. The Outright Monetary Transactions (OMT) will be open-ended and the liquidity created by it will be fully sterilised. It will focus on buying bonds with maturities of between one and three years. Mr Draghi stressed the strict conditionality of the EFSF/ESM programme, noting that the Governing Council could suspend the programme for a member state in case of non-compliance. The details of the programme more or less lived up to market expectations, with EUR/USD rallying to a high of around 1.265. Mr Draghi delivered no real surprises but that’s missing the point, he delivered and that was enough. It’s a rarity when you get exactly what you expect and the sell the fact crowd doesn’t react. As a result, risk assets remained well bid through the Asian session.

Looking at the equities in the region, the Nikkei is among the best performers, surging 2.1% helped by a weaker yen. USD/JPY finally broke out of the recent narrow range and traded up to 79.04 at one stage, as heavy unwinding of safe-haven strategies in equities and bonds weighed heavily on the JPY. Hong Kong’s Hang Seng has risen 2.4% and the Shanghai Composite has tacked on 4.2%. Markets in China have gained after the country announced further infrastructure investment. The ASX 200 is underperforming the region after giving up most of its early gains. European and US markets are likely to be in for a relatively flat start although we could see some follow-through buying after yesterday’s gains.

The US non-farm payrolls will be the key event later today, as the market will shift focus to whether or not the Fed will deliver QE III when it ends its meeting next Thursday. Non-farm payrolls are expected to grow by 163,000 and a number markedly lower would likely raise QE hopes to the detriment of USD. Over in Europe we have German and French trade balance due out as well as German industrial production to look out for. Sunday is a big day of data for China with CPI, PPI, fixed asset investment, industrial production and retail sales due out. With economic data on tap between now and Monday, this might be a source of caution by some investors in the region today. Monday has the potential of being a big trading day.

The local market charged higher at the open but topped out at around 4358 and has since retreated near 4324. However, what has been encouraging about today’s session is the recovery we have seen in the resource space. BHP Billiton (+2.2%), Rio Tinto (+3.4%), Fortescue Metals (+8.1%) are all enjoying significant gains today after iron ore halted its losing streak. Gold miners are also enjoying a day in the sun as all this action by global central banks continues to fuel demand for the precious metal. Unfortunately the big banks have struggled today and are part of the reason why the market has given up its early gains. All the big four banks are weaker with Westpac the worst, down 1.3%. We have also seen some rotation out of some of the defensive sectors weighing on the market. Healthcare stocks, which have been recent outperformers, are all struggling with CSL down 3.2%.

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