IG Markets Afternoon thoughts – Oct 24

Across Asia, regional markets are flying after European leaders said they are making good progress on a rescue plan, as hopes of a solution to the European debt crisis continue to dominate trading. The region has had a mixed reaction to China’s flash manufacturing PMI reading of 51.1 (up from 49.9), which indicates that the country is back in expansionary territory. The news has seen some Asian markets pull back on fears that some monetary tightening may be implemented. China is determined to control food and housing prices to ease soaring inflation and maintain economic development. The Hang Seng is up 2.8%, Shanghai is relatively flat 0.2% and the Nikkei is 1.4% higher.

In Australia, the ASX 200 is up 2.8% at 4256, with resources leading broad-based gains after offshore equities and commodities markets surged on hopes of a comprehensive EU financial stability plan plus speculation that the Fed is moving toward fresh quantitative easing. China’s strong flash manufacturing PMI number has seen the gains accelerate. In the resources sector, BHP Billiton, Rio Tinto and Fortescue are up between 2.2%-4.2% each, while Woodside, Santos and Oil Search are up 2.1%-2.8% each. Financial names are also rallying with all the major banks higher. We don't think anyone was expecting concrete measures until Wednesday, but it seems there's been agreement on bank recapitalizations. The more defensive sectors (telecoms, healthcare and utilities are lagging the market as risk appetite returns to the market. QE3 is now firmly on the radar after Janet Yellen's comments on Friday.

The market seems to be playing catch up to the gains posted in US and European markets on Friday night, with investors scared of missing out on what could potentially be a significant move higher. Today’s rally has had plenty of venom, with gains accelerating on the back of an expansionary PMI number out of China. However, it is important for us not to get ahead of ourselves, as the headline risk is still rampant. It was a case of up one day and down the next last week, as investors continued to make a play on headlines.

One of the biggest drags on the market over the past few months were fears of a China hard landing. Today’s figures give a bit of impetus to the rally, given they bode extremely well for commodities. These numbers might just be the catalyst this market needs. We expect to see the likes of copper extend its rally from Friday night. Copper is a great indicator of economic growth and risk appetite. LME 3-month copper saw a great rebound Friday, running up 61% to rout almost all of its losses the previous day. Volume in Shanghai hit a record, according to Triland, and those on the LME were also a pretty busy 175,362 trades. Still, traders put this move down to hopes that the euro-zone might be heading towards a resolution of its problems. . Today’s strong move on the Aussie market has seen it challenge a long term downtrend resistance line. A close above this line could result in further gains.

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