IG Markets: Afternoon Thoughts for Aug 23

Good afternoon,

Across Asia, regional markets are all cautiously higher despite the flat lead from Wall Street overnight. Investors seemed to be buoyed by signs of relative improvement in the Chinese economy after the Chinese Flash PMI came in at 49.8, which still is contractionary but ahead of last month’s reading of 49.3. The Kospi is the standout performer, up 3.3% while elsewhere the Hang Seng, Nikkei 225 and Shanghai Composite are all up between 0.5% and 0.6%.

In Australia, the ASX 200 is currently 18% firmer at 4154, just off its earlier highs of 4159. Once again the market is proving a conundrum for investors, shrugging off flat leads to be convincingly higher. Yesterday we saw similar size gains disappear in afternoon trade with the market finishing firmly in the red. Will the same thematic play out again today?

That’s what investors are asking themselves, which signals a lack of trust in equities at present. For the moment at least, the market’s gains are broad based with the energy, materials, financial and industrial sectors all seeing gains of between 1.3 and 3.1%.

It certainly looks like the market is pricing in some sort of announcement from Ben Bernanke at this weekend’s Jackson Hole symposium. We could see markets well supported ahead of the weekend as people ‘buy the rumour’ ahead of the meeting. If in fact markets do push higher into the meeting then they could easily be setting themselves up for failure; if Ben Bernanke doesn’t announce any further form of stimulus then you could easily see the money flow straight back out of the equities, with panic returning.

There was also some relief following this afternoon’s release of China’s flash PMI data. There had been rumours circulating this morning that the figure was going to be around the 44 mark; so when it came in at 49.3 there was a huge sigh of relief. God knows how the market would have reacted if the rumours had proved correct.

Interestingly, gold pushed through the US$1900/oz level this morning for the first time ever, topping out at US$1911.95/oz; since then, we’ve seen some profit taking start to emerge as margins were hiked in China by the Shanghai Exchange. Gold has had an incredible run, rising for eight straight weeks as participants piled into the safe haven commodity.

We’re expecting to see a healthy pullback in the short-term. There’s no doubt that it is overextended in the short-term on many different metrics. Ask yourself ‘who is left to buy’? This isn’t professional or smart money buying here, it’s probably just speculators, who are always the last ones to get into a trend. The smart, professional money will be looking to take profits at the moment and re-enter on a pullback.

ENDS

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