IG Markets - Afternoon thoughts 17/2/12

Across Asia, markets are trekking higher on optimism that Greece will be able to avoid a default. Reports that the ECB will complete a Greek bond-swap deal with eurozone national central banks over the weekend have fuelled risk appetite across the region. Risk appetite has been given a further boost by better-than-expected US jobless claims data and stronger-than-anticipated Philly Fed manufacturing data.

Japan’s Nikkei is leading the gains in the region and appears to have broken out and are clearly benefiting from the lower expectations of QE and subsequent appreciation in USD/JPY. The Nikkei has surged nearly 2%, while the Hang Seng is up 1%. Once again, the Aussie market is underperforming the region, with the ASX 200 only up 03% after having risen over 1% earlier. European markets are in for a very strong open after having finished yesterday’s session flat, while US markets are pointing to a relatively level start after having rallied yesterday.

Headline risk has really started to ramp up again, with the market transfixed on its perception of the outcome of the March 20 Greek redemption payment, and whilst its seems yesterday’s rumour of a bridging loan to fill this gap is off the table, it now seems the balance of probability has swung into Greece’s favour, with talk that the eurozone is putting together the finishing touches for a bailout to which we will get clarity on Monday Talk that the ECB is planning to swap its current bond holdings for newly-issued bonds has caught the imagination of the market, however there are a million questions surrounding the speculated ECB bond swap; if true, one questions if it would have negative ramifications on the bond market further down the line. If the ECB is allowed to simply swap its existing bonds at nominal (current levels) and realise a profit with the end result being that it doesn’t have to take part in PSI (Greek debt swap) and realise a 70% write-downs, does it become higher in the food chain of subordinated debt than private bond holders? Would this lower the incentive for private bond holders to buy debt, knowing the ECB receives preferential treatment? We are now led to believe the Greek debt swap will occur between February 22 and March 9, with the outcome ready a week before the redemption payment. So we are getting a clearer picture of the proposed timetable, and if it runs true, risk assets like equities should remain supported.

Despite yesterday’s surprisingly strong employment figures, many analysts remain of the opinion that the Australian economy is in bad shape. Greater pressure on Australian growth through tightening financial conditions will likely remain a dominant theme. A local recovery is being greatly impacted by interest rates and the high Aussie dollar. Several analysts have revised their forecasts following the employment data and feel it now seems unlikely the RBA is going to cut rates again, unless the unemployment rate jumps 'meaningfully,' Q1 inflation surprises or global conditions deteriorate significantly.

It has been a fairly mixed day on the reporting front with ANZ’s trading update the highlight. The bank released its first quarter trading update which met expectations. Underlying profit has risen to $1.48 billion, which was slightly ahead of analysts’ expectations. Billabong is out of its trading halt today and surged on the back of the private equity approach that it has rejected, on results and on news that it has raised US$285 million entering a JV with its Nixon brand; money that will be used to repay debt. The stock is up nearly 50%. Santos released its FY12 results, which were lower than expected. The company reported a NPAT of $753 million, up 51% but lower than an expected $880 million. The company’s shares are down around half a per cent.
ENDS

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