IG Markets - Afternoon thoughts - Dec 5

Across Asia, regional markets are mostly stronger, with sentiment lifted by news that Italy’s government unveiled tough new austerity measures. Italy outlined a EUR 30 billion three-year austerity plan. There are several reports flying out of Europe ahead of this week’s key EU summit. So far, they have been positive, leading to some of the gains we have seen in the region. The ASX 200 is leading the way with a 1% gain, while the Nikkei is up around half a percent. Elsewhere in the region, the Hang Seng has risen 0.3% while the Shanghai is 0.6% lower. In light of the gains we are seeing in the Asian region, US and European markets are pointing towards advances at the open.

Australia's S&P/ASX 200 index is trading 1% higher at 4333, despite some mixed leads from US markets. The materials are leading the way, with the miners having a big day after strong gains for metals on Friday night. BHP Billiton is up nearly 2% and OZ Minerals has tacked on 25%. Other bright sparks include Whitehaven Coal (WHC) and Aston Resources (AZT), which have said they are in talks about a ‘merger of equals’. WHC is up 1.8% and AZT has surged over 4%. The outperformance by junior uranium companies suggests that a decision by the governing Labor Party national conference to lift a ban on sales to India has been well received by investors. The Australian Uranium Association also said Indian companies might now start scouting for investment in the Australian industry, putting uranium stocks into focus. The financials are holding up very well, with all the big banks posting solid gains.

The Reserve Bank of Australia is widely tipped to cut interest rates by 0.25% when it announces its policy decision tomorrow. Such a move would be widely cheered by households, retailers and exporters going into the key Christmas trading period. However, some analysts feel it will be a close call and the RBA might hold back and sit on the sidelines this month. There are strong cases for both sides of the argument. Offshore forces, particularly from Europe, make a strong case for a rate cut, as a potential recession for Europe would be devastating for the global economy. On the other hand, a China slowdown as evidenced by the recent Manufacturing PMI numbers has seen the country take some steps to ease its monetary policy. However, the domestic economy is running along ok all things considered This could warrant some patience for the RBA, as it waits to see how the last rate cut will change sentiment once it filters through. Should the RBA hold back on cutting rates, AUD/USD will be the biggest beneficiary as credit markets have priced in a rate cut.

We've seen solid US economic data in recent times, and this trend continued last Friday night with positive employment data announced. Tonight, attention turns to US factory orders and non manufacturing PMI numbers due at 2am. Both pieces of data are seen as leading indicators of the general economy and traders are optimistic after last week’s fantastic consumer sentiment data.

Risk currencies have opened in Asian trade with a mildly positive bias, with EUR/USD moving to 1.3441 in thin trade. This has been dubbed as a pivotal week by many, so expect nervous and potentially volatile price action up until we get more clarity from the upcoming ECB decision and EU summit. On a positive note, Italy’s new technocratic government has announced extra budget cuts on Sunday worth around EUR20 billion over the next two years, or approximately 1.3% of GDP. This is more than had initially been debated, so it should come with a raft of endorsements from European officials. An article published in the UK Sunday Times was also a talking point on the trading floor. It suggested that a EUR1 trillion cash injection could be provided by the ECB if Europe’s leaders reach an agreement on a broader political reform later in the week. It is worth pointing out the recent CFTC data showed net short positions on the euro had reached 104,302 contracts, so if the market likes what it hears on Friday, there could be a sharp short-covering rally. The fun and games begin tonight, though in earnest with Angela Merkel and Mr Sarkozy due to meet to try and thrash out some sort of agreement on treaty change and fiscal discipline. European PMI’s will also get close attention, given most economists are anticipating a recession in Europe in 2012; expectations are for a flat read.

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