IG Markets Afternoon thoughts

IG Markets Afternoon thoughts

Across Asia, markets are surging on the back of bullish leads from US markets. Risk got an initial boost from speculation that Germany will back plans for the temporary and permanent euro-area rescue funds to run in parallel. Those hoping for less dovish commentary from Ben Bernanke overnight were disappointed, as the Fed Chairman put the US dollar on the defensive by asserting that the continued weakness in aggregate demand is likely the predominant factor behind the increase in long-term US unemployment. Mr Bernanke served notice that while policy normalisation is some way off, the Fed's accommodative monetary policies, by providing support for demand and for the recovery, should help over time to reduce long-term unemployment as well.

Japan’s Nikkei is outperforming the Asian region with a 1.7% gain as the last week of its fiscal year is now well underway. Anticipation is already building that the crossover to the New Year will prompt a resumption of the five-week-old USD/JPY rally. This has helped to sustain the Nikkei’s advance as it holds firmly above 10,100. The Aussie market is underperforming the region with a 0.8% gain after having opened near its highest point of the year. Looking at the rest of the region, the Hang Seng has surged 1.4% and the Shanghai Composite has advanced around half a per cent. US and European markets are pointing to gains at the open, with follow-through buying expected.

Bernanke’s comments provided a positive kick for risk, with the commodity currencies gaining ground versus the US dollar and yen amid higher equity prices. It was another firm session for the single currency as it rallied in line with risk assets. The euro is looking well supported above 1.33 for now, as eurozone finance ministers prepare a deal to strengthen the region's financial firewall by the end of the week. Combining the EFSF/ESM to create a €940 billion cushion will be a milestone for the region and is now widely expected. As a result, a formal announcement might not have much of an impact on sentiment.

Disappointingly for the Aussie market, a higher AUD once again capped the gains in equities. The local market traded as high as 4308 but failed to hang on to that level and has traded below 4300 for most of the session. It just seems that there is a lack of confidence in the domestic economy, with stagnant growth outside the mining industry hurting most sectors. This has become a dominant theme now and will likely continue to mount pressure on the RBA to act. An earnings downgrade by property developer Stockland is a further sign of how depressed Australia’s property market is. We also saw a disappointing first half report from Nufarm. Both stocks significantly underperformed the market today, with both losing ground. Disappointing company earnings have become a recurring theme in Australia as companies outside mining struggle to meet/deliver previous guidance. On a more positive note, gold stocks have underpinned the materials sector today with some solid gains for Newcrest, OZ Minerals, Sandfire and St Barbra after a big night for gold.

www.igmarkets.com.au

ENDS

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