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IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

FTSE 5784 -8
DAX 7331 +21
CAC 3536 -1
IBEX 7915 -15
DOW 13336 +13
NAS 2789 +4
S&P 1433 -1

Oil 97.17
Gold 1735

Risk assets have extended their gains in the Asian session ahead of some key market event risk announcements later today. Investor risk appetite has remained steady heading into the FOMC decision and Germany’s Constitutional Court ruling. The German constitutional vote on the ESM takes place at 18:00 (AEST) and clearly from looking at price action on the EUR/USD, which has remained well bid, the market is feeling this should pass. We would echo the markets sentiment here and would be very surprised to see a ‘no’ vote. The bigger issue will be on what the Court says about further integration steps, will we see new conditions for future bailouts and will Germany cap the level of future involvement? There is every possibility of a ‘pop’ in risk if these conditions are low.

AUD/USD has been the more significant mover in the Asian session with the pair printing a new high of 1.048. It had its second bullish outside day in four sessions suggesting the path of least resistance is higher and could continue to find buyers in the short-term up to the August 23 high of 1.0545. Looking at the equity markets in the region, the ASX 200 has climbed 0.8% with the miners finally coming to life after recent underperformance. The Hang Seng has risen 0.8% and the Nikkei is 1.2% higher. Premier Wen’s comments at the World Economic Forum in Tianjin that China has ample policy room to meet growth goals have certainly lifted sentiment in Asia. Premier Wen also mentioned there was 100 billion yuan left in the fiscal stability fund to boost growth, so after the recent 150 billion yuan programme perhaps more will be announced soon.

After yesterday’s gains, European and US markets look like they are in for a relatively flat/mixed start to today’s trading. With no fresh leads in Asia, it is likely we will have to wait for the German Constitutional Court ruling for further direction. Traders may take the view that the ESM vote will be passed with low conditionality and this could set us up for a good run into the FOMC meeting, where we could also see the Fed announce renewed asset purchases on an unlimited scale. We also get the European commission’s proposal on a single banking union (expected at 22:00 AEST) and the Dutch elections just after. The latest polls show Prime Minister Mark Rutte’s Liberal Party and the Labour Party running neck-and-neck and the EUR and equity negative event comes if any potential coalition government includes either the far-left (anti austerity) Socialist party or the far-right (anti-euro) Freedom party. The event risk ramps up tonight.

The local market had a bit of a run earlier on but has since sidelined with a lack of volume to drive it higher. On a more positive note, it is good to finally see the major resource names contribute to the gains after recent underperformance. Iron ore prices gaining 4.4% to $100.20 also helped compliment the short-term positive view. Perhaps we could see prices gravitate back towards $120 sooner than most thought. This would no doubt put pressure on some investors to pile into some of these miners before prices get away from their reach once again. BHP Billiton is up 1%, Rio Tinto has tacked on 1.1% and Fortescue Metals has surged over 3%.


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