IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

Across Asia, markets are mostly positive with modest gains in a relatively quiet session. Progress on the Greek front seems to be the main driver of sentiment in the region. Some reports are suggesting that a plan B was being formed whereby the Troika would release the EUR 14.5 billion funds needed to fulfil obligations to bond-holders when the Greek bonds mature on March 20. The plan would have the funds being distributed by EU authorities from an escrow account rather than by Greece.

The Nikkei has climbed 0.7% and is leading the gains in the region. Auto majors in Japan are enjoying a solid session after Toyota raised its full-year earnings target and on a softer yen. The yen weakened against the dollar after Japan’s current-account surplus narrowed. In Australia, the mining heavyweights are lagging on the index after BHP Billiton’s results slightly disappointed. The ASX 200 is up 0.3%, while the Hang Seng is 0.6% higher. Oil and gas stocks are leading the gains in Hong Kong. Based on the recovery we are seeing in the Asian region, US and European stocks are now pointing towards flat to modest gains at the open.

Investor risk appetite has been buoyant so far in 2012 despite the Greek drama, and if Greece concerns are put on the back burner, investor search for risk will accelerate. Once investors overcome the noise, there is some great value in equities at the moment. As a result, we are likely to continue seeing some consolidation as traders await a statement from Greek Prime Minister Lucas Papademos later Wednesday concerning an agreement on budget cuts needed to secure another bailout. Apart from Greece there are plenty of underpinnings to the durability of markets.

The high Aussie dollar (which many analysts feel will only get higher) is exerting a world of pain on many Australian domestic industries and other currency-sensitive companies. Despite yesterday’s decision, most analysts continue to see a modest trimming of the cash rate over the coming months.

Heading into yesterday’s rates decision, the prevailing thinking was that the RBA would cut rates by 25 basis points and that banks would pass through 10-15 basis points, thus easing a bit of margin pressure. When the RBA didn’t cut rates, some commentators seemed to suggest that banks may consider an out-of-cycle rate hike. This would seem unlikely in our view. Banks are already struggling with subdued loan growth and consumer credit demand, so you’d think the last thing they would want to do is scare customers off with higher rates. There’s a big difference between not passing on a full rate cut and deciding to actually hike rates. The former would have been a hard sell, but the latter would create a level of pandemonium that even the gamest of CEOs would probably shy away from. There are some big reports to look out for tomorrow, with Newscorp, Rio Tinto and Telstra set to release results.
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