IG Markets - Afternoon thoughts 19/12/11

Across Asia, regional markets are struggling with a lack of positive drivers and relatively low volume to support the bulls. The headline for the session is news that Kim Jong Il has died. This has seen the Kospi come off significantly and it is currently down 4.2%, leading the region’s falls. His death casts further uncertainty in the region. Ratings agencies unsettled investors and sentiment around Europe continues to deteriorate. The ASX 200 is among the worst performers in the region, with a 2.2% drop after a massive sell-off in the consumer discretionary space. Elsewhere in the region, the Hang Seng and Shanghai are down around 2% each, while the Nikkei is 0.8% lower. US and European markets are pointing towards significant losses on the open.

Australian shares opened lower with little positive news to counter persisting uncertainty over Europe's sovereign debt crisis. The benchmark S&P/ASX 200 has since extended the early losses, and is currently down 2.2% at 4065. Today’s weakness comes after Fitch Ratings lowered France's credit outlook and put other countries, including Italy and Spain, on review for a downgrade. Most of the damage is in the consumer discretionary and resource stocks. BHP Billiton has slid 2.3% and Rio Tinto is down 2.5%. The rare earth stocks (Lynas and Arafura) have been supported by reports that the world’s largest rare earths producer, Baotou Steel, has been barred from exporting rare earths from China. This would significantly affect global rare earths supply. Banks have dropped after ex-Commonwealth Bank Chief Ralph Norris was quoted in the press as saying the regulator risks hurting lenders by implementing new international banking rules too aggressively. Westpac is the worst performer out of the big four, with a 2.5% drop. Billabong International has tumbled 33% following a bleak trading update.

Weighing on sentiment today was ECB President Mario Draghi’s willingness to discuss a eurozone breakup. His predecessor Jean-Claude Trichet was always reluctant to even entertain any mention of a breakup. Mr Draghi warned of the costs of a breakup and also warned that structural reforms will still need to be implemented should a breakup occur. He also went on to divert attention towards the unlimited three-year loans being offered to shore-up eurozone banks. The ECB's 3-year liquidity operation is designed to prevent excessive deleveraging by banks and in turn starving the eurozone economy of credit. Strong demand for the 3-year LTRO might shore up confidence. It is likely that should the 3-year LTRO not have a high enough take-up then ECB will look to take further action.

Kim Jong Il’s death is the latest spanner in the works. Although a succession plan was already in place, change means uncertainty and uncertainty is not good for markets. Some reports are suggesting that S&P could come out and downgrade France's triple-A rating before Christmas. This is likely to keep some investors on the sidelines this week. Mr Draghi is expected to speak overnight and he may give further information on what steps the ECB might be looking to take to solve the debt crisis. ‘European fatigue’ now seems to have engulfed the market, with investors showing little interest in playing them ahead of the festive season. With that being the case, the path of least resistance for riskier asset classes is certainly down.

ENDS

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