IG Markets - Afternoon thoughts

IG Markets - Afternoon thoughts

Across Asia, markets are mostly weaker in a quiet day of trading without many drivers to get investors excited about. As US markets finished the session with mild losses on Friday, Asian markets were already facing a weak lead this morning. Risk assets are struggling after markets traded relatively ‘risk off’ on Friday. Commodities declined on the back of a stronger US dollar, which has resulted in a tough session for the resource-heavy Australian market. The ASX 200 is down half a per cent, with miners the hardest hit. Gains in the defensive sectors are helping the Aussie market stave off a sharper decline Healthcare and utilities sectors are outperforming the overall index.

China has probably been the most newsworthy country around the region, releasing services PMI data that showed contraction; very much at odds with the HSBC read, which showed both improvement and expansion. Chinese Premier Wen Jiabao also released some targets on future growth at the annual ten-day National People Congress, suggesting the country would like to see 7.5% GDP growth in 2012, whilst also targeting 4% inflation. These targets represent a strong slowdown and a miss relative to economist’s expectations, but the positive price action in China suggests his comments were bullish. The Hang Seng is down 1%, while the Shanghai Composite is a touch higher.

You can almost sense a tumble-weed moment playing out in European and global equity markets, where we are seeing the calm before the potential storm as the event risk in all parts of the world comes alive. It appears European bourses will open relatively unchanged and US markets a touch weaker, but don’t be surprised if some of the speculative money comes out of the market in anticipation of a pickup in range expansion.

Thursday is D-Day for investors to accept or reject the Greek debt swap, and the uncertainty ahead of that day could undermine sentiment towards risk assets. Most of the weekend debate has been centred on both the French elections and level of participation in upcoming Greek debt swap. With it clearly looking as though Greece will call upon the collection action clauses (CAC), one hopes it will actually trigger a CDS event. You simply feel that if ISDA doesn’t classify this as ‘involuntary,’ it makes the whole CDS market seem invalid and must have implications on other nations’ bonds, with private holders surely losing confidence thus causing some forced selling, given their hedge/insurance doesn’t work.

Post-reporting season in Australia, several stocks have gone ex-div today including QBE Insurance, Brambles, Iluka and Worley Parsons. This has contributed to the market’s weakness today. A key event for the Australian market this week is the RBA’s interest rate decision due out tomorrow. The RBA is widely expected to leave rates unchanged and as a result, no major currency reaction is anticipated. Analysts feel the accompanying statement will be even less dovish than what we’ve seen in recent times. Other major events this week include domestic GDP and employment data on Wednesday and Thursday, plus US jobs data on Friday. Similarly in the US, rates markets have started pricing a somewhat more aggressive following Fed Chairman Ben Bernanke's testimony in Congress, while still expecting a delay of 2-2.5 years before any rate hikes begin. Investors will also be watching China’s February CPI and PPI inflation on Friday. A significant drop in both would be conducive to further monetary easing.

www.igmarkets.com.au

ENDS

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