IG Markets - Morning Prices Dec 7

US markets bounced overnight on reports that European leaders are looking to significantly increase the size of the bailout fund. The latest plan will be presented at this week’s EU summit and could include running two separate rescue funds and gaining increased support from the IMF. This would effectively double the size of the bailout fund.

Among the major averages, the Dow Jones Industrial Average climbed 0.4% to 12150. The S&P added 0.1% to 1258, while the NASDAQ lost 0.2% to close at 2650. However, European markets were mostly weaker on the back of S&P’s ratings warning.

Markets had given up ground yesterday after S&P put 15 eurozone nations on ratings watch. This put the EFSF under threat, as a downgrade of any of the bailout fund’s six guarantors would effectively lead to a downgrade of the EFSF. Some analysts are now seeing this as a positive step in forcing European leaders to get their act together swiftly. The plan involves allowing the eurozone’s existing EUR 440 billion bail-out fund to continue running when a new EUR 500 billion facility comes into force in mid-2012, almost doubling the rescue system’s firepower. This latest move might just be the ‘bazooka’ Europe needs to appease markets. We expect Europe to continue to take centre stage this week, with rampant headline risk.

On the local front, all eyes are on the big banks after they put their interest rates under review following the RBA’s decision to cut rates by 0.25%. So far, only Bank of Queensland has passed on the rate cut to borrowers. Traders will also be looking out for Australia’s third quarter GDP numbers at 11.30am. Current GDP forecasts are for 1% growth. With growing optimism that Friday’s EU meeting will result in a solid plan to address the region’s debt crisis, we are calling the Aussie market to open up 0.6% at 4286. The gains are likely to come from the materials sector, with BHP’s ADR pointing to a 1.2% gain.

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