IG Markets Afternoon thoughts 19th September

Across Asia, regional markets are all lower despite the positive leads from overseas markets on Friday evening. The disappointing developments over the weekend included German Chancellor Merkel losing another regional election and the vote on the Greek bailout funds being delayed; this has seen risk assets start the new week under pressure. With the Nikkei 225 closed, the Hang Seng is the worst performer, down 2.2% while the Shanghai Composite and Kospi are 1.5% and 0.3% weaker respectively.

In Australia, the ASX 200 is currently 1.7% weaker at 4078, just above its intra-day lows of 4070. With the next tranche of Greek bailout funding still no certainty the market is once again pondering the magnitude of a sovereign default on global markets and that question alone is enough to have investors moving into cash. Predictably, today’s losses are broad based with the financial, industrials, energy and materials sectors all trading lower between 1.6% and 2%.

It’s been a pretty ordinary start the new week for risk assets given the disappointing developments in Europe over the weekend. Markets, particularly in the US had had a pretty good run over the last five sessions but a lot of people are partly attributing that to Friday’s triple witching.

US Treasury Secretary Tim Geithner received everything but a warm welcome at the European Finance Ministers meeting over the weekend after he suggested the Europeans should implement similar measures to the US’s TALF programme a few years back. If that wasn’t enough, German Chancellor Merkel was crushed in regional elections and European Finance ministers delayed the vote on whether or not Greece gets their next tranche of bailout funds. All in all, the perfect recipe for ‘risk off’ trade.

The fact markets had rallied into the weekend possibly had them pricing in positive developments, so that is likely also weighing on trade. The big event this week in the extended FOMC meeting which gets underway tomorrow night US time. There is plenty of expectation heading into the meeting with many expecting and hoping Fed chairman Ben Bernanke will surprise the market with a number of stimulus measures.

It will be very interesting to see how the markets behave before Thursday morning, when the FOMC hold their press conference. Will the market continue to push higher in expectation, possibly exposing itself to a ‘buy the rumour, sell the fact’ type scenario or will traders sit on their hands and take a wait and see approach? Either way, there’s likely to be volatility amid no signs of progress in the European situation.

Ben Potter
Market Strategist
IG Markets

ENDS

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