IG Markets Afternoon thoughts – Sept 23

Across Asia, regional markets are all lower following the terrible set of leads from overnight markets that saw participants running for the exit doors on fears of a global recession, following yesterday’s dire outlook from the US Federal Reserve. With the Nikkei 225 shut for a public holiday, the Korean Kospi is the worst performer, down 4.4%, while the Shanghai Composite and Hang Seng are 0.9% and 1.6% lower respectively.

In Australia, the ASX 200 is 0.8% lower at 3932 having earlier traded to lows of 3882. The big talking point was the sharp move higher in the market around lunchtime with the index threatening not just to come off the low’s, but actually go positive. The question traders had been asking themselves ‘is this genuine buying or merely short covering after a torrid week’? There are a lot of value minded investors who really feel that the market has discounted a lot of bad news and is ready to push towards 4000 in the short term and rightly so. If you believe valuations at present the market is incredible buying. However, we feel the global market has moved on from worrying about a US and European recession, to now a global recession, the recent fall in copper testament to that.

The interesting comment of the day has to come from ECB member Mr Knot (the head of Dutch central bank) who said a Greek default cannot be excluded. This is interesting because we feel this is the start of a communication exercise to let market gradually price in a ‘soft default’. Not until the EFSF has been fully set up and voted through will there be enough funds to recapitalise the european banks, but the process of allowing fund managers and traders to position themselves can take place well before the event. Greece will eventually default, it is broke and has an uncompetitive economy, but the way markets react to this is key and it looks like we are in the early stages of Greece’s much anticipated default.

Disappointment that the Fed didn’t deliver the “home run” that the market had been hoping for, but instead highlighted the significant downside risks to the US and global economies certainly spooked the market. On top of that we had Chinese PMI data (or at least HSBC’s version of it) showing contractionary levels of activity, poor manufacturing data out of the strongest European nations in Germany and France, and perhaps most worryingly, anecdotal evidence of coal and iron ore shipments destined for Asia being delayed due to slowing demand.

So is it all that bad? Probably not. It’s always darkest before the dawn and if there’s one thing we all should have learnt from recent years, it’s that markets get overly hysterical and feed on its own fear, accentuating market plunges like the one we witnessed last night. Unfortunately for the market, a lack of political leadership seems to be one of the biggest reasons as to why we can’t make any meaningful inroads into solving this crisis.

Over in Europe, government heads, Euro Finance Ministers and bodies like the IMF are blatantly behind the curve and very slow to react. And when they do it’s normally with nothing more than jawboning. Similarly in the US, Washington is stuck in political gridlock with both parties posturing ahead of next year’s Presidential election. The Republicans in particular seem hell bent on not showing any flexibility when it comes to raising taxes, making it almost impossible to make any serious inroads into the US’s deficit problems.

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