IG Markets - Afternoon thoughts 6/3/12

Across Asia, markets are mostly weaker as investors continue to react negatively to China’s 7.5% target growth. Concerns about global growth will always be a big factor, as investors continue to wonder whether China can successfully engineer a soft landing. Markets continue to decline, despite the US consistently delivering encouraging economic data. Some are attributing today’s weakness to reports that Israel is losing patience with Iran. In Australia, today’s focus was on the RBA’s interest rate decision and statement. As expected, the RBA left interest rates unchanged at 4.25%. Resources around the region remain weak following sizable falls by offshore peers and base metals prices.

Japanese shares were positive early, but have since drifted lower in line with the rest of the region. The Nikkei is down 0.7%, while the ASX 200, Hang Seng and Shanghai are each over 1% lower. Given the weakness we are seeing in the region, European and US markets are facing moderate losses at the open. If a pullback is to fully reveal itself we would need to see the S&P close below 1361 (the 21-day moving average), which would expose the former trend resistance at 1325 (drawn from the October2007 high) where we would expect more speculative, short-term traders to support prices.

It seems that Greece is becoming more vocal about using its collective action clause (CAC)and reports seem to suggest that the take up will be firmly above the 66% needed so that that the deal doesn’t fall apart. At the end of the day, the bulk of Greek government bonds are still held by Greek banks that will need the new (swapped) bonds as collateral for future ECB funding, so it seems logical that they take part.

As everyone thoroughly expected, the reserve bank kept rates on hold. It is clear from the commentary that the RBA seems perfectly content to keep monetary policy as it is, knowing that it can look to cut as and when it feels global data could roll over. With the accompanying statement largely as expected, there were no major price movements in the equity market. However, the Aussie dollar extended its slide from this morning. AUD/USD printed a low of 1.06116, which is near its one-month low. The last paragraph of the statement was key and seems less hawkish than the recent statement of momentary policy, hence the weakness in the AUD/USD. There is almost a binary view on rates now and economists who feel the global picture will hold up around current levels are of the opinion the RBA will simply not cut, however if you feel the data points will weaken then the 40 basis point cut currently pencilled in by the credit markets would be about right. With the rate decision now out of the way, investors can look forward to domestic GDP and employment data on Wednesday and Thursday.

It is surprising to see risk assets come off significantly after the China news, considering the move had been well flagged in advance. Most analysts remain confident that more than 8.0% growth can be achieved. What could have spooked risk appetite are reports that a third bailout for Greece might be needed, and developments in Spain may lead to suggestions that the fiscal compact is already being weakened. Spain's Prime Minister Mariano Rajoy backtracked on Spain's 2012 deficit forecast. On Friday, he set a deficit-to-GDP target of 5.8% for 2012, significantly higher than the 4.4% figure mentioned previously.

ENDS

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