IG Markets Afternoon Report

Good afternoon,

Across Asia, regional markets are getting blooded following the very negative leads from Wall Street, which are being driven by fears the European sovereign debt crisis is spreading Italy, which is Europe’s third largest economy. The Hang Seng and Kospi are the worst performers, both down 2% while the Nikkei 225 and Shanghai Composite are 1.4% and 1.3% weaker respectively.

In Australia, the ASX 200 is currently 19% weaker at 4494, right on its lows of the session. Debt concerns across Europe and the US are continuing to weigh on investor sentiment with the result being money pulled out of equities and reweighted into gold and US treasuries. Losses for the day are broad based with the heaviest losses coming from the healthcare, consumer discretionary, financials, materials and energy sectors which are all seeing losses of between 1.5% and 2.1%.

We’re seeing a massive ‘risk off’ trade at the moment. Every time we seem to be gathering momentum the European debt situation rears its ugly head again. This time, however it not just another small European country in question. Rather, it’s Italy, Europe’s third biggest economy and said by many to be ‘too large to bailout’.

We’re seeing wholesale selling across all risk assets as genuine fear sweeps through. Things in Europe just seem to be going from bad to worse; you get the feeling that authorities are merely trying to plug the holes in a sinking ship. At the end of the day, they’re just delaying the inevitable.

Until hard decisions are made and a long term solution is found, these concerns are going to continue to derail global confidence, potentially for years to come. Now that Italy is the talking point, the whole situation has taken a nasty turn in terms of contagion. Whereas there wasn’t much US exposure to Greek debt, Italy is a completely different kettle of fish. The US exposure to Italy would be enormous compared to Greece, meaning this weighs on US banks as well.

And if the European problems weren’t enough, we’re continuing to see little progress made in talks regarding the raising of the US debt ceiling. As each day passes, the situation becomes more desperate, with more panic setting in that a resolution won’t be found. For the last two months, the market has been working on the assumption that a solution would be found, with people positioning themselves accordingly. However, a big unwind could be seen if this scenario does not play out.

ENDS

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