IG Markets Afternoon thoughts

IG Markets Afternoon thoughts

Across Asia, markets are weaker despite a fairly positive lead from US trade. Markets are just looking tired at these levels and in the absence of a catalyst; it seems investors are happy to remain on the sidelines. The Shanghai Composite and Hang Seng are each around 1% weaker, while the Aussie market has declined around 0.3%. Japanese markets are closed today for a bank holiday. The region continues to fret over China growth concerns after mining giant BHP Billiton commented on ‘flattening’ iron ore demand. We also heard some comments from PBOC Governor Zhou Xiaochuan, who said that conditions in China are ripe for interest rate liberalisation.

Given the weakness we are seeing in the Asian region, US and European markets are pointing towards modest losses at the open. With US markets at four-year highs, we wouldn’t be surprised if markets correct in the near term. Global equities have gotten off to a strong start to 2012 and many participants are divided as to the next direction for many of the major asset classes. After the run markets have had, a correction is never far off. We already saw European markets pull back from eight-month highs yesterday, with risk sentiment relatively subdued before the Apple news. However, the ‘Apple effect’ is unlikely to drive markets much further. One thing that seems certain is that policy expectations and subsequent responses from central banks will be key drivers of market sentiment and direction.

Despite the recent positive run in US economic data, New York Fed President William Dudley continued to sound dovish, warning of risks to growth from higher gasoline prices, fiscal cutbacks, and housing. Though he acknowledged that recent data has been more ‘upbeat’, he sees inflation as likely to moderate further and stated that ‘nothing has been decided’ about further accommodation. This dampened the USD, which had started pricing out further easing. However, the softer US dollar profile looks conspicuous in the light of the overnight rise in US treasury yields, suggesting fresh incentives will be needed for another push higher. Later today, investors should look out for US building permits and housing starts data. Treasury Secretary Tim Geithner and Fed Chairman Ben Bernanke are also scheduled to speak.

After opening a touch higher this morning, the local market has given up significant ground. Some of the main factors driving sentiment were the RBA minutes and a speech by the head of BHP Billiton’s iron ore division. BHP says China’s iron ore demand is flattening and demand growth is falling into single digits. The impact on BHP’s share price has been relatively limited, as markets had been expecting this. This had been mostly flagged and the market had priced in a slower growth profile for China. What is concerning is the potential impact of single digit demand growth for iron ore. Iron ore demand from China makes up a bulk of our exports and this will impact terms of trade. This shows that terms of trade are peaking and likely to flatten down the line. As a result, the announcement has been quite negative for the AUD, which has rallied in recent times driven by demand for commodities. AUD/USD dropped from around 1.062 to 1.055. There isn’t much on the local economic calendar tomorrow, but traders will continue to watch the Aussie dollar and US dollar as comments from the Fed hit the wires.

www.igmarkets.com.au

ENDS

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