IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

FTSE 5795 -17

DAX 6810 +49

CAC 3238 +25

DOW 13287 +8

NAS 2728 +1

S&P 1406 0

Oil 106.32

Gold 1659

It started off as a fairly quiet Asian session with most markets in the region relatively flat. HSBC’s final manufacturing PMI number showed a slight improvement to 49.3 but didn’t have much of an impact on regional markets. We have since seen optimism improve dramatically, particularly in China. The Shanghai Composite has broken trend line resistance and is only 0.7% away from its 200-day moving average, a fate it hasn’t seen in 51 weeks. The index was given a bit of a nudge higher today, as the HSBC PMI read showed improvement and the Securities Regulator cut trading fees, but it is becoming apparent that the market is warming to this index, and could be ready to see some solid upside in the coming months. The Shanghai Composite has surged 1.6% and the Hang Seng is 1.2% higher. The move back above 80 in USD/JPY has given the Nikkei some relief, with the index currently trading 0.5% higher. The ASX 200 is only up 0.2% today and is already up 17% for the week so far based on current prices.

The FTSE had the luxury of pricing in yesterday’s strong US ISM report, and it looks as though the data will feed into the DAX, CAC and IBEX when they resume trading today. The S&P futures are up 0.5% from the close of these European benchmarks, so, using this as a guide, we should see modest upside on open. However, the S&P futures are actually 0.6% lower from the close of the FTSE, so the UK bourse should come under modest profit taking on open. Traders are really struggling to get a handle on data at present, and it was clear from the price action in the USD and equity markets that the poor regional manufacturing reports (namely Dallas and Chicago) had seen traders position for a weak national report. It was also unclear whether the strong performance in manufacturing in Q1 was positively impacted by weather; the April print seems to have put that notion to bed.

Breaking the report down, we saw strength in new orders, production, supplier delivers and employment, which has got traders feeling just a little more confident about Friday’s payrolls report. Unfortunately, with manufacturing making up a relatively low percentage of US GDP, the strong sub-component may have a limited impact on the bigger picture. Having already seen the official Chinese manufacturing, which was the highest in a year, and the UK PMI’s which grew at a slower pace, all eyes now fall on Europe with the PMI data set to remain in contractionary territory. The ‘flash’ reading was released a week ago and showed a slowdown from 47.7 to 46.0, however that took into account data from just Germany and France, and today’s report will include Spain, Italy and other peripheral nations, so further weakness looks ominous. The Italian employment rate also looks set to tick up to 9.4% from 9.3%, which is well below that of Spain, but still of major concern. Again we focus on EUR/USD, and while we may well see the ever-diverging growth differentials between Europe and the US, the pair doesn’t seem to want to do anything. It really does feel like the calm before the storm, with EUR/USD trading in a 112 point range in the last five sessions and 38 points on a closing basis.

We saw caution creep into the local market today after the big move we saw yesterday. However, the market seems to be well supported and managed to remain in positive territory despite an early dip. It is difficult to see the local market push through yesterday’s high without a significant catalyst to help it along. There is a significant resistance zone between 4450 and 4480. As a result, we wouldn’t be surprised to see a slight pullback and some consolidation after the recent move through 4400. Surprisingly, the financial sector is the major drag on the index today after ANZ Bank posted its first half report. As of yesterday’s close, ANZ was up about 16.8% for the year and therefore today’s 1% fall is hardly anything to worry about. The reality is that the bank and its peers have been consistently growing earnings and paying solid dividends with undisputed pricing power locally. ANZ has been the top pick in most analyst portfolios, with its Asia growth strategy the key ingredient of its success. Going forward, its diverse revenue and funding base will continue to set it apart from its peers. Westpac reports its results tomorrow.
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