IG Markets - Afternoon thoughts - Dec 6

Across Asia, regional markets are weaker after S&P placed most of the eurozone sovereign credit ratings on negative review. After having seen a big improvement in sentiment over the past week or so, this piece of news saw markets take a big step backwards. The overnight session was looking solid before news that German Chancellor Angela Merkel and French President Nicolas Sarkozy pushed for a rewrite of the European Union’s governing rules to tighten economic cooperation. However, markets lost significant ground immediately after the S&P ratings changes news surfaced. The losses have accelerated into the Asian session with the Hang Seng down 1.4%, the Nikkei 0.8% lower, the ASX 200 falling 1% and the Shanghai shedding 0.6%. In light of the weakness we are seeing in the Asian region, US and European markets are pointing towards losses at the open.

The Aussie market is down 1% at 4275 in cautious trade, following S&P putting eurozone sovereign credit ratings on negative review. With Asian markets having anticipated overnight strength on Wall Street, and US stock index futures weakening slightly on eurozone rating fears, the Australian market has been unable to extend its rally. The RBA’s decision to cut interest rates by 0.25% has had a muted response from the Aussie market. Investors are taking a slightly cautious view in light of S&P's warning on European credit ratings. The materials sector is leading the decline, with Newcrest Mining down 4% after being downgraded to buy from hold by Deutsche Bank. The energy sector is also struggling, with Woodside Petroleum down 1.8%. Telecoms are outperforming with Telstra up 0.3%.

The interest rate decision was always going to be a close call with economists divided on whether the RBA would cut rates. The decision to cut interest rates by 25 basis points to 4.25% is the RBA’s second successive cut. This move will be widely cheered by households, retailers and exporters going into the key Christmas trading period. It was one of the closest calls we have had for a while, with an almost even split in economists’ views. An important fact to take out of the statement is the greater emphasis on weaker Asian trade as a consequence of the significant slowing in Europe. We initially saw a fairly muted reaction by the Aussie market but it has since come off and is right near its lows of the day. The Aussie dollar has also lost some ground, with AUD/USD slipping below 1.02 following the announcement.

It is still very much a headline risk market after S&P’s warning threw a spanner in the works, undoing all the hard work done by the bulls over the past week. The positive momentum we have seen in markets recently reflects that investors are happy with the progress they have seen in Europe. Leaders are said to have agreed on a plan to impose a stronger fiscal union. It is also encouraging to see them work this quickly to come up with a solution. Some of the issues agreed upon include automatic sanctions to help enforce fiscal discipline and no further private-sector participation in future bailouts. Ahead of the EU summit at the end of the week, markets seem to have started pricing in a comprehensive solution. As a result, some analysts are beginning to think the summit will fall short of conclusively paving the way out of the sovereign debt crisis, but it might deliver just enough to keep the ’Christmas rally‘ in risk assets and risk currencies rolling along into 2012.

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