IG Markets Afternoon thoughts 2/6/11

IG Markets Afternoon thoughts 2/6/11

Across Asia, regional markets are all sharply lower following the strong sell-off on Wall Street and the continuing stream of weaker-than-expected global economic data. The Shanghai Composite is the biggest decliner, down 2% while elsewhere, the Nikkei 225, Hang Seng and Kospi are all weaker between 1.3% and 1.6%.

In Australia, the ASX 200 is currently 2.1% weaker at 4607, just off its session low of 4610. After the huge sell off seen on US markets overnight following a set of extremely poor manufacturing and private sector employment reports, the local market was always likely to come under heavy selling pressure today. Losses across the market are broad-based with all sectors well into negative territory, however the biggest falls are being seen across the materials, energy and financial sectors, which are all down in excess of 2%.

On top of the worries about the European debt situation, there is a real concern about the global growth situation. Nearly all growth data over the last few weeks has pointed towards a slowdown, with the big question now being is it just a mid-cycle slowdown or the beginning of something more sinister? This came to a head overnight as both the UK and US reported weaker-than-expected manufacturing reports.

Our gut feeling is that this is just a temporary slowdown in a longer-term recovery. As well as being in a seasonally weak period, it looks like growth is finally succumbing to the affects of higher energy prices. Everyone knows that it usually takes a number of months before higher costs work their way through the system and begin to crimp growth; it looks like this is one of the factors playing out now.

US markets have been shrugging of the economic data weakness over the last few weeks, with the major indices largely being held up by the switching of funds from cyclical names into more defensive stocks. It looks like that, as well as a bit of end-of-month window dressing has largely played out and traders have finally come to the realisation that the path of least resistance is lower in the short to medium-term.

Locally, it was a bit of a relief to finally see some stronger-than-expected retail sales figures. April retail sales showed growth of 1.1%, well ahead of forecasts for growth of only 0.4%. However, it’s again brought the question of interest rates firmly back into focus. While most economists think a June hike is a long shot, a move before August is seen as a much more likely proposition. We’re firmly of the view that there is no urgency for the RBA to hike and believe they would be much better served waiting for confirmation of a rebound in economic growth, as they have forecast, before pulling the rates trigger.

ENDS

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