IG Markets - Afternoon thoughts 11/11/11

IG Markets - Afternoon thoughts

Across Asia, regional markets are enjoying mild gains after picking up some positive leads from overnight trading. There is a slight improvement in sentiment after some positive news out of the US and Europe. However, traders remain cautious ahead of the weekend, with headline risk remaining a key element. The Hang Seng is leading the region with a 1% gain. The Nikkei is down 0.2% on the back of weaker-than-expected tertiary industry activity data, but the Shanghai is 0.3% stronger.

Australia's S&P/ASX 200 index is up 0.8% at 4278 after hitting an intraday high of 4290.5, following the 0.9% rise in the S&P 500 on lower jobless claims, ECB support for Italian bonds and Greece's appointment of former ECB Vice President Lucas Papademos as Prime Minister. After a fairly subdued morning, the market seems to have picked up the pace in the afternoon session. Looking at the companies, Fairfax is down 6.5% at 86.5 cents on heavy volume after Fairfax family company Marinya sold its 9.7% stake at 85 cents late Thursday. Ramsay Health Care is up 1.4% after reaffirming its earnings guidance, while securing a $2 billion equivalent debt facility for future acquisition, development projects and working capital. Leighton Holdings is flat after saying work in hand fell 5% to $44 billion since June 30, while reaffirming fiscal 2012 earnings guidance.

After falling to a session low yesterday of 1.3484, forex traders decided that the world was not going to end anytime soon, and despite Italian yields trading north of 7% they felt that Italy was not yet insolvent with EUR/USD making a sharp move back to 1.3653, albeit short covering. Selling rallies is still the way to play this pair, as visibility in Europe is still very poor and any moves in EUR/USD back to around 1.3750 to 1.38 would be a good place to initiate fresh shorts. US data was a positive, with initial claims falling below the 400,000 level, while a 4% decline in the US trade balance (with record net exports) went some way to suggesting we may not see downward revisions to the upcoming 3Q GDP print. However, as we know an improving US economy is a sideshow to Europe at present, it seems that the market is mildly optimistic about the prospect of having Mr Mario Monti, a trained technocrat, potentially running Italy and forcing the changes needed to bring confidence back to the bond market. Mr Papademos has taken power in Greece and he seems to be the right man for the job given he was an ECB economist, although no one can really envy his role in what really has to only hold downside risks to his career!

A strong auction of one-year BTPs also helped to instil some confidence, although the ECB was heavily present and there was probably an element of pressure on the Italian banks to take part, with traders suggesting it could be a good precursor to Monday’s sizeable bond auction. There is every chance we will get progress on who is likely to lead Italy over the weekend, and we should see the Italian parliament give final approval to budget law as well, so this may cause some worry to euro shorts. However, it seems while last night should be seen as a net positive for the bulls, the general consensus is that we need to see the ECB being more aggressive in its bond buying strategy to buy time for Italian politicians to sort themselves out. No one is convinced by the EFSF, even if there is some sort of leverage involved. With the ECB becoming lender of last resort, to some, it seems the only way to bring yields down to sustainable levels. However, we will have to wait until the New Year when ECB member Mr Stark steps down and we have seen changes to the European treaties.

ENDS

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