IG Markets Afternoon thoughts – Sept 16

Across Asia, regional markets are all firmly higher following the positive overnight developments in the Europe and the US that saw US dollar funding lines opened up by global central banks. This in turn saw money flow back towards risk assets, relieving some of the recent uncertainty. The Kospi is the standout performer, up 3.4% while the Shanghai Composite, the Nikkei 225 and Hang Seng are all up between 0.5% and 2%.

In Australia, the ASX 200 is currently 2% firmer at 4154, just below its session highs of 4160. After major central banks pledged overnight to offer lending and liquidity support facilities to European banks struggling to access short-term funding, market sentiment got a welcome shot in the arm with equity markets surging higher. That sentiment has translated into broad based gains for the local market with the heavyweight energy, financial, materials and industrial sectors all higher between 1.8% and 2.8%.

There has been a real scramble to cover short positions in the Australian market over the last two days. We’ve had a massive underperformance versus the S&P 500 this week and now we’re seeing the market play catch-up. It will probably take a bit longer before the underperformance gap is recouped.

There’s a no doubt that the developments reached overnight are positive for markets as it addresses a liquidity issue that had begun to creep into European banks. There was a lack of confidence beginning to build in the European interbank lending markets and these US dollar funding lines will help ease these confidence issues.

However, these funding agreements will only address a symptom of the European sovereign debt crisis, rather than the actual issue which is solvency. This doesn’t solve any of the structural issues and doesn’t magically wipe the burdensome debt levels carried by many European nations. So, for participants to think this is the magic bullet is simply wrong.

We may see markets continue to push higher on the back of these developments but we can’t imagine it will be the beginning of a sustained move higher. There are still many larger issues that need to be solved before authorities have the situation under control.

Ben Potter
Market Strategist
IG Markets

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