IG Markets - Afternoon thoughts 10/1/2011

IG Markets - Afternoon thoughts 10/1/2011

Good afternoon

Across Asia, regional markets are all firmer after Wall Street managed to put European issues on the backburner and edge higher on the eve of earnings season. The Kospi is the region’s best performer, higher by 1.7%, while the Shanghai Composite is seeing a gain of 1.5%. Elsewhere, the Hang Seng and the Nikkei 225 are firmer by 0.6% and 0.4% respectively.

In Australia, the ASX 200 is currently 1% stronger at 4148, just off its earlier session high of 4150. Today’s market action has been buoyed by an in-line result from Alcoa, a strong performance by the heavyweight materials sector and a private equity-led surge in M&A activity. Elsewhere, gains across the market are broad based with the energy, consumer staples and financial sectors all seeing gains of between 0.6% and 1.4%.

For today at least, there seems to be a bit of cautious optimism about the US earnings season. Alcoa results released overnight were hardly inspiring, but were in line with expectations and this seems to be enough for Asian markets. US earnings outlooks have been greatly wound back over the course of the last month and all the market really needs to see is some sunshine beyond the clouds to have a bit of a rally. Much of the negativity surrounding Europe and its many issues has more than likely been priced into stocks, so forward forecasts will be closely assessed this time around. Hopefully US corporates can paint a bright enough picture to convince some of that ‘sidelined money’ that stocks, on a fundamental basis, are cheap and worth buying at these levels. This will undoubtedly depend on how much of a slowdown Europe in particular, and to a lesser degree, emerging markets, will impact future revenues.

The one big plus that financial markets have working in their favour at the moment is improving US economic data. This should not be underestimated. With all the problems of the last few years, and the emergence of China as a legitimate economic superpower, it should not be forgotten that the US is still the world’s largest and most influential economy. While Europe is a basket case and its structural setup will ensure it remains that way for many years, the US economy, if it can maintain its trajectory, can more than offset this. Can you imagine where equity indices might be right now if we had the current European issues and a gravely deteriorating US economic landscape? It wouldn’t be pretty.

The best we can hope for this year is that China continues to defy its critics (who get it wrong year after year and never learn), that the US continues its gradual recovery, and Europe at the very least manages to contain the collateral damage of its debt predicament. If that scenario plays out, we can actually have a pretty good year.

Cameron Peacock
Market Analyst
IG Markets

ENDS

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