IG Markets Afternoon thoughts

IG Markets Afternoon thoughts

Across Asia, markets have come off their lows, shrugging off soft leads from US and European trade. China growth concerns had seen markets struggle as investors used this as an opportunity to take some profits off the table after the recent run. Whether or not China can successfully engineer a soft landing has been a dominant theme for a while now, and this might have been a slight overreaction by markets that were beginning to look ‘toppish’. However, there has been a reversal in sentiment on speculation of an imminent reserve ratio cut by the PBOC, and reports that the Chinese government was making it easier for fund managers to invest in Chinese stocks, after a decade of tight capital controls. It has not been publically announced, but if true, should help boost Chinese stocks and help stabilise the volatility in USD/CNY.

The Aussie market has rallied from the lows, recovering from a loss of around 0.7% to now be trading down 0.3%. Elsewhere in the region, Japan’s Nikkei is a touch lower on its return to trading after yesterday’s bank holiday. The Hang Seng and Shanghai were in positive territory earlier but are now relatively flat as investors bargain hunt after shares had struggled all week. In light of the recovery we are seeing in the Asian session, US and European markets now pointing towards a flat to modestly firmer open.

Traders will be keen to hear about US existing home sales (expected to improve by 0.9%), given we have started to see some of the surprise indices that the investment banks use to monitor economic data releases versus consensus roll over, and we will need to see a resumption of better-than-expected data to keep pushing markets higher. Apart from tonight’s US economic releases, focus will also be on Thursday's release of HSBC's preliminary China PMI. There isn’t much on the local economic calendar tomorrow.

Locally, we had a couple of disappointing reports in the retail space today with big falls for David Jones (DJS) and Kathmandu Holdings. It seems there is a structural shift in the retail sector, with companies racing to adapt and prevent/halt the slide they are seeing in earnings. DJS announced its future strategic direction today, which failed to prevent the negative reaction to a full-year earnings downgrade (35% to 40% drop). While the strategic changes might be positive for future earnings, there is still executional risk for the company. DJS will also be investing a lot of money to implement these strategic changes, while a lot of factors affecting the sector are out of its control. On a macro level, interest rates, consumer confidence and exchange rates will play a pivotal role.

Commentary from heavyweight miners BHP and Rio Tinto were yesterday’s catalyst. However, it seems traders in Asia today saw the situation in a slightly more rational light; Chinese consumption of iron ore has been expected to slow to around 6% for years now, and looking at Rio specifically, the fact that it is spending vast sums of dollars increasing production to 283 million tonnes per annum (mtpa) by 2013 and perhaps even as much as 353 mtpa by 2015 shows it is still holds confidence in future demand. Australia’s third biggest miner, Fortescue Metals, is aggressively ramping up production to 155 mtpa, and remains undervalued by the market, which is a great way for investors to get exposure to the China story.

www.igmarkets.com.au

ENDS

© Scoop Media