IG Markets Afternoon thoughts

IG Markets Afternoon thoughts

Across Asia, markets are mostly weaker with the Aussie market uncharacteristically outperforming the region. Regional markets had a fairly flat to weaker start on the back of subdued risk appetite. Investors also digested benign US home prices and consumer confidence data. A firmer US dollar weighed on commodities and put resource stocks under pressure Australian shares opened relatively flat, but have since bounced north, with the benchmark S&P/ASX 200 up 0.9% at 4342. This is the local market’s highest level since November last year. The Aussie market has been stuck in a resistance zone of around 4300 for a while and after today’s break higher, this level will be considered as support for the price action.

Elsewhere in the region, the Nikkei is around 1% lower, while the Hang Seng is down 1.2% and the Shanghai Composite has shed 1.2%. The Nikkei was the highlight of trade yesterday after it erased losses from last year’s earthquake. Japan’s index has been well supported by a weaker yen over the past few months and has outperformed the region. However, today the index was dented by over 200 Japanese stocks going ex-dividend. US and European markets are pointing to a flat to modestly weaker open.

In the absence of the cautious stance of Fed Chairman Ben Bernanke, the USD would have likely accelerated to the upside. Many analysts feel the US recovery will be sufficiently durable to prevent the Fed from adopting further easing and are therefore bullish on the USD.

On the European front, Italian and Spanish bond auctions went fairly well, although weaker than maximum targets. ECB President Mario Draghi said that eurozone governments should continue to take decisive measures after the LTROs have stabilised sentiment, noting the current stabilisation should not make them pause in their responses. This came as Spanish Economy Minister Luis de Guindos said that the country is now considering Treasury-backed joint bonds for the regions, highlighting concerns over the regional government debt and sustainability.

However, the euro remains well supported above 1.33, indicating that investors are certainly more positive on Europe. Some of the data to look out for later today is US durables orders, German preliminary CPI and UK current account numbers.

This morning’s comments from the RBA really sparked the rally in equities today and saw the Aussie dollar continue to struggle. The fact that the RBA has finally acknowledged that economic conditions are widely divergent across the economy (with business failures and debt defaults now above their norms), and that industries like retail, manufacturing, construction and tourism that dominate the east are facing headwinds is an encouraging sign for investors. These comments seem to have been taken as dovish by most analysts and have lifted sentiment this morning.

Although defensive sectors are leading the gains today, we have seen a marked recovery in retailers, industrials and miners. Taking a closer look at equities, Newscorp is looking quite interesting at the moment. The stock is trading near its highest level in two years after bottoming out in August last year and clearing last week’s high today. NWS has high leverage to the US economy and is looking more positive following the recovery we have seen in the US. The company is also benefiting from a stronger US dollar, given the majority of its earnings are from the US.

www.igmarkets.com.au

ENDS

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