IG Markets - Afternoon thoughts 30/1/12

Good afternoon,

Across Asia, markets are struggling as investors exercise caution ahead of the European summit. Despite a fairly flat open, markets in the region have succumbed to uncertainty surrounding a deal between Greece and private bond holders. Over the weekend, Germany was reportedly planning for greater surveillance over Greece's taxation and fiscal affairs. Latest news suggests that Greece is reluctant to agree to a German proposal for its budget to be controlled by a eurozone commissioner as a condition for receiving a second €130 billion bail-out, saying the country was already prepared to implement tough but necessary decisions.

The Nikkei is leading the region’s falls as exporters struggle due to a significantly stronger yen. USD/JPY is now trading below 77. Looking around the region, the Nikkei and Hang Seng are down 0.6% each, while the Shanghai and ASX 200 are around half a per cent lower. Given the weakness we are seeing in Asian trade, US and European markets are pointing towards a softer open.

The European Union opens its first summit of 2012 later today, with Greece remaining the focal point. There is very little room for complacency from European leaders, as buoyant markets could swiftly turn on the first sight of slip-ups. Although there was a limited reaction to Fitch's downgrades of five eurozone nations on Friday, this was another warning that more needs to be done to solve this ongoing debt crisis. The fact that Germany is considering greater surveillance of Greece indicates that the European Union and other participants in Greece's adjustment programme are extremely wary of the country's ability to bring debt down to sustainable levels. Although many investors are beginning to think the worst is over regarding the European crisis, some analysts feel this is a dangerous assumption to work on. The supply of credit from the ECB may have succeeded in ring-fencing the banking sector, but regaining economic competitiveness comes from policies beyond the ECB's control, and the governments in driving seats do not appear to share the urgency encouraged by both markets and central banks.

Looking at the week ahead, there is not much on the local economic calendar, however next week’s RBA interest rate announcement is likely to get wide coverage, with some analysts starting to feel the decision will be a close call. Despite this fact, the retailers are among the best performers today with gains for the likes of David Jones, JB Hi-fi and Harvey Norman. Interest rate and currency-sensitive stocks will be in focus over the next week.

Gold has clearly come back onto traders’ radars again, given the recent commentary from the Federal Reserve that more needs to be done to support an economic recovery, whilst providing an explicit level of PCE (personal consumption expenditures) at 2%. QE3, according to some, could come as early as April, which of course is helping to boost gold.

Gold continues to extend the recovery that began in late December, and as long as the uptrend remains in place, $1765 (target one) and subsequently $1803 (target two) could be quite achievable.

Gold recently traded through downtrend resistance drawn from the all-time high in September and this now acts as support. Key near-term support comes in at $1649 (January 25 low), ahead of $1625 (January 13 pivot low). Longer-term support lies at $1523 (December 23 low), which if broken on a closing basis would suggest a much deeper correction.

EMDS

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