IG Markets Afternoon thoughts

IG Markets Afternoon thoughts

Across Asia, markets have rallied in response to gains seen in US and European markets. In the US session, markets rallied on the back of better-than-expected US retail sales data, followed by the FOMC statement acknowledging the improving US economy. However, the Fed gave no clue as to whether or not further monetary easing would be on the cards. From the statement, it seems the chances of QE3 have been lowered, but policy remains easy. Markets have responded well today, but there is still some confusion in risk currencies as a stronger US dollar is capping gains. We have seen fairly choppy trading in AUD/USD and EUR/USD.

The Australian market is one of the best performers in the region, rising nearly 1% with materials and financial names leading the gains. Japan’s Nikkei is most prominent in the region, with a 2% rise after the yen weakened further this morning. USD/JPY is above 83 for the first time since April 20. A weaker yen helps the Nikkei as it reduces pressure on Japan’s exporters. Hong Kong’s Hang Seng is 1.3% higher and the Shanghai Composite is half a per cent firmer. European equities look set to open with positive momentum after closing at or near their highs. The DAX, after failing to close above 7000 looks set to knock on the door again, whilst the FTSE edges ever closer to breaking the 6000 level. US futures have pulled back a touch during Asian trade, although hardly enough to shown concern.

So we now have a clearer understanding of how the Fed is positioned and whilst it upgraded certain wording to reflect the economic improvements, suggesting it sees ‘moderate’ economic growth as opposed to ‘modest’, it still acknowledged that there are ’strains in the global financial markets’ and is likely to keep rates low until late-2014. At the margin this is a mildly hawkish statement, however what could be better than clear economic growth with low rates; certainly the heavy price action in gold and higher US treasury yields suggest QE3 remains an ever-fading possibility unless we see a declining trend in core inflation.

The talk on the floor has centred around three things. The ever-growing disparity between the Fed and the BOJ, which is helping USD/JPY continue to creep higher, thus in turn supporting Japanese equities. The higher US yields, where two-year yields are at 34 basis points, whilst the ten-year has broken out of the 2.09%-1.79% range it has been stuck in since mid-December. Will this trend continue, and if so, will the break out in US markets cause investment officers to change tact and reposition themselves more heavily in equities? The other talking point is clearly the moves in financials and the implications for capital management going forward. One has to be encouraged by the stressful nature of the Fed’s tests, which once again put the Europeans to shame; however, on the other hand, whilst it is positive that some of the giants of global finance are in solid financial health, the high levels of capital requirements are also making ROC (return on capital) less attractive for shareholders.

Locally, there was a switch in the leaders today as the materials and financial sectors took over from the healthcare and consumer staples. This is a positive sign as it shows investors are more comfortable with risk assets. However, we continue to see disappointing economic figures, with this morning’s housing starts data much weaker than expected. The market printed a high of 4295 today and continues to struggle near the 4300 level. This is in sharp contrast to other global indices, which recently broke above some key levels. We currently have the Dow above 13,000, the Nikkei above 10,000, the Hang Seng above 21,000 and the Dax above 7,000. Such underperformance highlights the lack of confidence Australian investors have in the domestic economy. Tomorrow we have MI inflation expectations and new motor vehicle sales data due out.

www.igmarkets.com.au

ENDS

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