IG Markets Afternoon thoughts

IG Markets Afternoon thoughts

Across Asia, markets are mostly mixed in a surprise turnaround for equities in the region. The early rise seen in regional equities was ahead of the HSBC China PMI number. Early whispers were for a strong reading above 50, however this proved not to be the case as the number came in at 48.1; well below the previous month’s 49.6 reading. The number (below 50) is in contractionary territory and confirms the fears cited by China bears. China is experiencing weakening domestic demand and sluggish export orders. Japan’s trade numbers were also a highlight of the session as they largely beat consensus and saw a slight recovery in the yen.

Regional markets significantly came off their highs following the China PMI announcement. There was a big move in the Aussie dollar, which had recovered significant ground leading up to the announcement. AUD/USD slid from around 1.048 to a low of 1.03763, its lowest level since January 20this year. Despite coming off its highs, the Aussie market managed to hold on to some gains and is currently around 0.4% higher. Elsewhere in the region, Japan’s Nikkei is also about 0.4% higher, while the Hang Seng and Shanghai have slumped into negative territory. We have also seen a significant pullback in the futures, with US and European markets now pointing towards a weaker open.

Recurring fears about Spain are likely to continue weighing on European markets later today. The rise in Spanish yields overnight will no doubt catch the attention of the Europe sceptics out there. A swathe of European PMI numbers due out tonight and below consensus prints will only add to the bearishness. Investors should also look out for comments from ECB President Mario Draghi and Fed Chairman Ben Bernanke. Given the volatility we have already seen in the Asian region, we would not be surprised to see similar moves in US and European sessions as a lot of data is set to hit the wires.

After the big drop we saw in the Aussie dollar today, it is not surprising to see the Aussie market outperform the region today. A high Aussie dollar has been one of the main reasons for the local market’s underperformance for a while now. David Jones’ poor run has extended into today’s session after the stock received several broker downgrades following yesterday’s announcement. Out of four broker (DB, MS, Citi, RBS) changes from this morning, the average price target for DJS is now $2.03 and the stock is currently trading at $2.39. Given the weaker tone in the equity markets and lingering concerns about slower growth in China, today’s sub-50 flash Chinese manufacturing PMI reading for March will likely embolden the AUD bears. The trend amongst traders is to sell rallies in the Aussie, and that will certainly not change anytime soon; despite the PBOC having a modestly expansionary policy to support growth, this coming as the OIS market is suggesting that we will get our first full cut in June, with 41 basis points over the next year. The path of least pain, however, seems to be lower in the short term after a pretty violent initial sell-off immediately after the announcement.

www.igmarkets.com.au

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