IG Markets - Afternoon thoughts 29/2/12

Across Asia, markets are rising on hopes of a strong take-up of the ECB's three-year LTRO operation. Earlier, we saw US markets close the session above key levels and at their highest level since 2008. Markets in the region are on course to finish the month with a bang, after having to shrug off some fairly negative news including an Irish referendum on the EU fiscal compact and some mixed US economic data. Focus has now switched to the ECB's second LTRO. Expectations for a large take-up have kept risk assets in demand and after months of speculation, consensus estimates have probably risen to around similar levels of the last offering (€ 489 billion), if not higher. Retreating oil prices have also helped ease pressure on equities.

The Nikkei (+1.3%) has bounced back to lead the region after recent weakness, with the Aussie market (+1.1%) not far behind after some underperformance lately; a strong day for Australian miners and Japanese industrial production data probably has something to do with this. Elsewhere in the region, the Shanghai Composite has well and truly broken out of its longer-term downtrend, but is flat for the day. Given the strength we are experiencing in the region, a modestly higher open should be seen on US and European bourses.

Ireland caused a stir in early US trade after announcing it will be holding a referendum. Whilst this has implications for Ireland if the vote fails, in terms of applying for financial assistance from the ESM, it is not a deal breaker for the EU fiscal treaty. This is due to the fact that support of 12 contracting parties from the euro area would be enough for the treaty to go ahead. One gets the sense that Irish Prime Minister Enda Kenny is sitting on the optimistic side of the fence, and whether this turns out to be a vote on Ireland’s future in the EMU is the question traders are asking.
On a more positive note, the third Portuguese Troika review was successful and the next loan tranche will be handed over, so unlike Greece (where the situation dragged on and on), it seems Portugal is doing the hard yards and winning over the sceptical Troika. Growth forecasts were ratcheted down, and given the austerity measures, this makes it questionable whether Portugal will meet future fiscal targets (one to watch for the future). However, since the country is fully-funded until late 2013, it is not an immediate concern.

Tonight we get the LTRO II, which has now been so hyped-up that one wonders if it will cause much reaction at all. There is a chance that if the number comes in-line with expectations it may actually become a non-event for price action, with only a take-up of less than €350 billion and north of €700 billion causing a significant move in risk assets.

AUD/USD has trekked higher today following a report that showed Australia’s retail sales increased in January by the most in four months, boosting demand for the local currency. The Aussie dollar rallied to a high of 1.08237 against the greenback in Asian trade. On the reporting end, Worley Parsons (WOR) and Harvey Norman (HVN) were some of the notable names. WOR’s interim profit was up 18% to $152 million, below consensus of $164.4 million. EBIT was up 29% to $248 million and an interim dividend of 40 cents was declared. Economic uncertainty and currency fluctuations remain problematic and no guidance was given. Some analysts feel this might be a good opportunity to get into the stock, considering its leverage to the resource sector. HVN’s first-half profit was down 2.1% to $128.9 million, above expectations of $114 million. Like for like sales were down 6.3% and worse than expected. Sales were lower on intense competition, heavy discounting, price deflation and the strong Aussie dollar. Both WOR and HVN are struggling today.

ENDS

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