IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

Across Asia, markets are mostly higher after picking up on the positive momentum seen in US markets towards the close of the session. After a relatively subdued start, markets have certainly picked up the pace today as investors look to close out the quarter with a bang. For the third consecutive session, the Aussie market is leading the gains and has traded at a fresh high for the year (4361). Unlike previous sessions, the local market’s gains today came despite an appreciating Aussie dollar. The ASX 200 is currently 0.4% stronger at 4355, its highest level since November last year. Risk appetite generally seems to be buoyant in Asian trade.

Japan has also had an interesting session after posting some mostly positive economic data. The data was supportive of the yen and saw USD/JPY slip to 81.83. This move hurt the Nikkei, which is currently down 0.2%. Elsewhere in the region, the Hang Seng has shed 0.6% while the Shanghai Composite is up 0.3%. Following the risk recovery we have seen in the Asian region, US and European markets are pointing to a stronger open.

Further QE being priced out for now seems to have driven the weakness we have been seeing in US markets this week. Although central banks globally appear to be resisting fresh stimulus, they are aware that any form of credit contraction will lead to pro-cyclicality in the trade cycle and will need to be avoided at all costs. Weakness in credit in most cases aggravates weak conditions in the real economy. Ahead today, we have the Eurozone finance ministers meeting, plus US personal income/spending and consumer sentiment data. Commodity currencies in particular may tread cautiously ahead of the official Chinese March PMI due on April 1.

Discussion is still ongoing about how to boost the firepower of the combined EFSF/ESM. There is still a difference of opinion on how to utilise the remaining capacity of the EFSF. The possibility of governments making accelerated cash payments into the ESM is also being looked at. We have seen the euro accelerate today ahead of the meeting, which could be a key event risk driver. Investors will keep an eye on any comments coming out of the meeting, particularly on any developments in Spain.

In Australia, there is a growing consensus that the government’s obsession with a surplus will force the RBA into loosening policy. This week’s price action in Australian equities and the Aussie dollar is also highly suggestive of this. Despite early weakness, the Aussie market was well supported today and managed to outperform the region yet again Next week brings us the RBA’s cash rate decision, with most analysts still expecting no change to the current setting. At current levels (4355), the Aussie market has risen 7.3% for the quarter after being saved by this week’s gains (+2%). This is a more respectable result after the market had struggled with significant underperformance for most of the year. However, the negative cycle in company earnings is likely to continue to dampen sentiment into the next quarter and some investors will still be wary of downgrades after Leighton’s profit warning this week.

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