IG Markets - Afternoon thoughts 16/2/12

IG Markets - Afternoon thoughts

Across Asia, markets have declined on the back of ongoing uncertainty surrounding the Greece sovereign debt drama. The euphoric reaction to comments from the PBOC's Zhou, indicating that China was at the ready to give more support to Europe, faded as it became clear that EU officials remain highly reluctant to approve a second Greek bailout package worth €130 billion.

Risk sentiment has quickly turned negative as investors lose patience on the Greece situation. Japan’s Nikkei is down 0.3%, the Hang Seng is 0.7% lower and the Australian market is down 1.7%. European and US markets look set to follow suit and see a wall of sellers on open.
There seems to be a war of words building between Germany and Greece, with tensions mounting when the market would clearly like to see officials singing with one voice. Greek Finance Minister Mr Venizelos suggested that Europe’s wealthier countries are ‘playing with fire’ by toying with the idea of pushing Greece out of the EMU, whilst Greek President Mr Papoulias went on the offensive after recent comments from German Finance Minister Mr Schaeuble that compared Greece to a bottomless pit. Mr Papoulias’ comments seemed to make reference to World War II, which can’t help tensions in any way.

There have been unconfirmed reports that the second rescue deal could be pushed beyond March, with Dow Jones suggesting there may be a ‘bridging loan’ that would provide Greece with just enough funds to make its €14.4 billion bond redemption on March 20. This would avoid giving Greece the full €130 billion until after the April Greek elections, when it could get a clearer picture of whether the newly-elected party will keep to the austerity measures. On another note, it seems that the Greek Finance Minister has suggested the bond swap details will be announced on Monday, just after the EU (who are scheduled to have another minister’s meeting) provide further colour on the bailout. It all seems a bit of a mess really, however it has become clearer that Germany seem much more open to Greece defaulting, whilst Greece feel they are being victimised, with the terms of austerity too harsh and language directed at them too derogatory.

In Asia the highlight was the Aussie jobs number, which came out 28% above even the highest of 25 estimates surveyed by Bloomberg. Probably the only disappointment in the numbers came from a fall in average hours worked, but all other metrics, including participation rate, showed that unemployment is tracking in the right direction. Interestingly, the probability of a rate cut by the RBA in March has fallen from just over 50% to 35% now, and while AUD/USD spiked to 1.0760, it is worth keeping an eye on EUR/AUD, which is 30 pips from crashing through the all-time low.

The Australian market is underperforming the Asian region, with the materials sector significantly weaker. It has been a particularly tough day for the resources after commodities came off their early highs overnight. The mining heavyweights like BHP Billiton and Rio Tinto are down around 2% each. BHP’s latest move lower leaves it facing a key support level at around $34. The stock is currently trading at around $35.60 and has a key support zone between $34 and $35. BHP has bounced off this support on a number of occasions over the past six months and investors will be eyeing it.

It has also been a tough day for reporting companies, as general market weakness has seen most stocks struggle. Qantas has bucked the trend, surging over 5% after its first half results beat its previous guidance and also analysts’ expectations. The airline reported 1H12 PBT of $202 million, above market expectations and also above management's guidance from late November ($140 million - $190 million). Apart from beating the top-end of guidance, QAN also announced significant cost-cutting measures, which eased market concerns regarding a potential capital raising.

Apart from Westpac’s disappointing first quarter trading update, Wesfarmers’ first half report also failed to impress. WES released its first-half results, which were slightly below expectations. Net profit was $1.18 billion, up 0.3%, but below an expected $1.238 million. Brambles released its first-half results, which were slightly below expectations. NPAT came in at US$239.5, up 9%, but below an expected US$278 million. BXB is down 3.3% to $7.

ENDS

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