IG Markets - Afternoon thoughts 16/12/11

IG Markets - Afternoon thoughts

Across Asia, regional markets are enjoying modest gains after picking up a fairly positive lead from US markets. The US is in recovery mode, with recent data suggesting the world’s biggest economy has put the worst behind it. However, trading is relatively subdued into the end of the year, with some caution being exercised due to a potential S&P downgrade. On the data front, there is not a lot happening in the Asian session, with no major economic releases. The Hang Seng, Nikkei and ASX 200 are up between 0.2% and 0.4% each. US and European markets are pointing towards modest gains on the open.

The Australian share market is up 0.4% at 4156, with the defensive sectors leading the mild gains. However, there is some caution after Standard & Poor's warned that low credit growth would crimp US bank earnings and IMF's Christine Lagarde stated that the world economic outlook is ’quite gloomy’. The local banks are holding up fairly well, with ANZ leading the pack after putting on 1.3%. The retailers are struggling after JB Hi-fi issued a profit warning. JBH is down 13% and has dragged the consumer discretionary sector lower. There are some bright spots in the materials sector, with the big miners posting gains.

The consumer discretionary sector has been beaten up today following JBH’s profit warning. This seems to have caught out quite a few investors who would have been pre-empting a recovery in the sector following the recent rate cuts. The profit warning was also followed up by some broker downgrades for JBH and some of its peers. We also saw a profit warning from Caltex, which might start to receive some broker reviews soon as the refiner continues to struggle on various factors. Some of the factors include high oil prices, a higher Aussie dollar and refinery shutdowns.

Overnight, EUR/USD traded between 1.2957 and 1.3050, with the pair finding good support above 1.30 in Asian trade. Again we saw a continuation of the stronger US data, with US weekly jobless claims dropping to 366,000, while both the Philly Fed business conditions and Empire manufacturing showed strong improvement, putting a bid into risk assets. The US has been the shining light in terms of economic growth, although one has to suspect if Europe really deteriorates, then growth in 2012 will almost certainly face headwinds. It was promising to see a successful bond auction overnight in Spain, which encouraged traders to buy not just Spanish bonds but Italian bonds as well. Comments from IMF chief Christine Lagarde spooked investors after she mentioned ‘there is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super-advanced economies that will be immune to the crisis that we see not only unfolding but escalating.’

While it seems EUR/USD is being supported around 1.30, albeit short covering, tonight traders will be looking for positive comments from Mario Draghi who is scheduled to speak in early European trade. US core CPI will also be announced, however given the Federal Reserve is not looking to put the Fed funds rate up anytime soon, don’t expect this to spur too much volatility. On another note, Reuters is reporting, citing EU diplomats that the next EU summit is scheduled to be held on February 7 to 8, so if we do see risk assets deteriorating through January, this will again come into focus as the next ‘key date’ to which the market can get excited about, only to be disappointed once we know the outcome.

Gold remains in focus for traders, as it has desperately held onto the long-term support provided by the uptrend which began in October 2008. The rumour mill has suggested that a number of European banks have been unloading their physical gold reserves recently to raise capital, in an effort to provide insurance against an Armageddon scenario unfolding in the euro banking sector. Traders will be watching to see if this tide of selling pressure is enough to breach the support that exists at the uptrend line, which sits at around $1550.

ENDS

© Scoop Media