IG Markets Afternoon thoughts 7/7/11

Across Asia, regional markets are mostly higher following the modest gains on Wall Street as market participants largely ignored the latest nervousness over contagion in the Eurozone and last night’s interest rate hike by the People’s Bank of China. The Hang Seng is the best performer, up 0.7% while the Shanghai Composite is 0.2% firmer. The Nikkei 225 is flat on the session.

In Australia, the ASX 200 is currently 0.2% higher at 4612, having recovered from its earlier session low of 4584. Despite US markets managing to edge higher overnight the local market began the day in subdued fashion, and it was not until a better-than-expected jobs creation number that the index moved into positive territory for the day.

The healthcare and industrial sectors are the day’s two best performers while the financial and materials sectors are seeing more modest gains. On the downside, the information technology and consumer sectors are among the day’s worst performers.

Whilst we continue to see offshore market push higher, the domestic market is continuing to battle stiff headwinds, none bigger that political uncertainty. It’s keeping a lot of local investors sidelined as they just don’t know what the government is going to do The carbon tax is front and centre of people’s minds ahead of Sunday’s announcement of the specific details. No one really knows the impact it is going to have. This, combined with the huge amount of economic releases due between now and weekend are seeing participants keep their powder dry; it’s being put in the ‘too hard basket’.

One might have expected somewhat of a negative reaction to China hiking interest rates again overnight. However, this has not been the case as the general feeling is that give or take a bit, China is close to the end of its tightening cycle.

Overnight price action was pretty interesting to say the least. We were amazed at how equity markets managed to hold up given the numerous negative headlines; Chinese tightening, weaker US services PMI data and European banks slumping on sovereign debt contagion fears. This would have normally seen the market close significantly weaker, but for whatever reason there was enough buying to see the market rally significantly intraday. This is a classic case of trading price rather than trading what you think should happen.

There will be a lot of focus on tonight’s interest rate decision from the Bank of England and the ECB. The ECB will likely be the most interesting, with the market pricing in a 100% chance of a 25 basis point rise. However, for some reason my gut feel is that the ECB may surprise by staying on hold. I know they should not look at anything but inflation but I just think they would be finding it hard to ignore the vulnerability of equity markets and the impact a rate hike could have on already fragile sentiment.

ENDS

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