IG Markets Afternoon thoughts

Across Asia, regional markets are mixed to mostly lower following the negative set of offshore leads. Sentiment towards the latest plans in the Eurozone turned bearish while reports over the potential for a hard landing in China also spooked investor sentiment. The Nikkei 225 and Shanghai Composite are the worst performers, both down 0.7%. The Kospi is 0.9% firmer while the Hang Seng is shut for business.

In Australia, the ASX 200 is currently 1.3% weaker at 3985, with most sectors firmly in the red. A sharp move lower overnight in risk assets is seeing our cyclicals under pressure with the materials, energy, consumer discretionary and industrial sectors detracting the bulk of the points. On the flipside, it’s the defensive healthcare, telecoms and consumer staples names that are outperforming on a relative basis.

As we mentioned last night, we had a feeling caution was beginning to re-enter the market and it appears we got it spot on. As we keep on saying, nothing has actually changed in this whole situation. The market managed to stage a relief rally and in response, people started to become optimistic about the progress in Europe. However, the reality that nothing had changed hit quickly, with participants realising the political mind games between European officials are far from over.

The other development overnight that seemed to spook investors a little were two research reports from well known global brokers suggesting China may be headed for a hard landing. Whether or not this plays out is anyone’s guess. However, one thing we do know is that markets tend to be leading indicators. The fact that the Shanghai Composite is down 22% from its yearly high, with the banks having been smashed is raising more questions than answers. These worries could easily start to weigh more.

The biggest event risk on traders’ minds ahead of tonight’s session is the German vote on the expanded powers of the EFSF. The vote (expected at 20:00) is key and whilst most see this being voted through, markets will remain nervous ahead of it. Nonetheless, there is plenty of talk from within Chancellor Merkel’s own party suggesting they will vote against it. If for some moment of lunacy they don’t vote it through, all bets will be off as risk assets such as equities, commodities, risk FX (euro, AUD, NZD) get smashed.

However, the likely scenario is that it gets voted through and markets become happier for a short amount of time, which may translate into some buying interest among cyclical/risk assets.

Ben Potter
Market Strategist
IG Markets

ENDS

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