IG Markets - Afternoon thoughts 18th October

IG Markets - Afternoon thoughts

Across Asia, regional markets are all weaker after Wall Street dropped overnight on concerns over fresh moves to address Europe’s debt crisis. News that China’s economic growth slowed by more than forecast in Q3 has seen the region extend its losses. The Hang Seng is the region’s worst performer, down 2.8%. Elsewhere, the Nikkei 225 is down 1.6% and the Kospi has shed 1.4%. The Shanghai Composite is outperforming the region with a 0.9% loss.

In Australia, the ASX 200 has extended its loss to 2% on the back of the worse-than-expected Chinese economic data. The index has broken below key psychological support at 4200, and is currently trading at a fresh session low of 4190. We had seen the market come off its lows following the RBA minutes, which hinted to a rate cut, should inflation remain in the targeted zone. Almost all sectors are weaker, with a broad sell-off across the resources. The materials and energy sectors are the worst performers, while the telcos are higher on the back of Telstra’s NBN shareholder approval.

Today the market seems to be paying the price for its recent exuberance - some would say over exuberance. After all, it has rallied hard from the beginning of October on two main drivers, a European plan to come up with a plan, and some non-recessionary, although hardly inspiring economic data out of the US. We have constantly warned that the market should not get too far ahead of itself, as the highly anticipated ’European solution‘ needs to be more than just talk. It actually needs to be devised, deliverable, and receive buy-in from the investment markets to spark a sustainable move back into equities.

Predictably, the market took another leg down after the release of China’s monthly batch of economic data. Despite most of the numbers being pretty much in-line to slightly ahead of expectations, the GDP figure of 9.1% was slightly down on the 9.3% consensus estimate. Again predictably, the market focussed on this data point and got itself in a panic. Our view continues to be that this is an overreaction. China is doing just fine. It is still gobbling up as much of our resources as we can sell it, and its demand remains insatiable. Best listen to the likes of BHP, Rio and Fortescue – the guys that actually ship the stuff – as opposed to the fear mongers that purport to know what’s going.

ENDS

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