IG Markets - Afternoon thoughts May 10

FTSE 5532 +5
DAX 6490 +15
CAC 3111 -8

DOW 12855 +20
NAS 2623 +2
S&P 1358 +3

Oil 96.98
Gold 1593

Across Asia, markets are mostly weaker on the back of China economic numbers which were interpreted as a sign of weak domestic demand. Sentiment had improved earlier after the EFSF confirmed it will release some funds to Greece today. In US trade, risk assets pared losses on reports that Greece would likely receive a €4.2 billion payment from the EFSF later today. This saw markets shrug off growing concern that Spanish banks are underfunded and the political crisis that Greece is facing. The positive momentum into the close of the US session seems to have fed into some of the Asia equities. There has been quite a lot of economic data to digest in the Asian region, with some key announcements in Australia, Japan and China.

In Japan, we had current account and bank lending data coming out early in Asian trade, with the data exceeding expectations. This was followed by jobs numbers in Australia, which came in much better than expected. China has also announced its trade balance numbers, reporting a trade surplus of $18.4 billion in April versus expectations for a $10.4 billion surplus. Most risk assets in the region retreated following the China numbers, as weak import growth indicates slowing domestic demand. Both export and import growth fell well short of expectations. The Aussie market is outperforming the region and is currently flat. Japan’s Nikkei is down 0.2%, the Shanghai Composite is 0.2% lower and the Hang Seng has declined 0.9%. European markets are facing a relatively flat open, while US markets are set to open a touch higher.

Although Greece is set to receive a €4.2 billion payment from the EFSF later today, with the rest to be disbursed depending on Greek requirements on the premise that it is not needed before June, sentiment seems to be still fragile. The deadlock over the formation of a new government continues in Greece, raising the prospect of a new election next month. This definitely seems like the outcome that no one wants to see and it could really derail markets. Ahead today, the Spanish government is expected to announce the partial nationalisation of a major domestic bank, making the state the biggest shareholder in the institution. Renewed fears about the country’s banking sector saw Spanish 10-year yields jump over 6%. It is going to be a big day for event risk, with US trade balance and unemployment claims also due out. Fed chairman Ben Bernanke is also expected to speak and investors will be looking for any comments on the state of the economy.

Locally, the miners have once again been the centre of activity with a significant pullback in the iron ore miners following China’s numbers, whilst gold stocks have rallied after the recent sell-off. A weak global economic environment is making it difficult for China to achieve sustainable economic and social development. BHP Billiton is now trading at around $34.41 after having hit a high of $34.73 earlier. Gold miners Newcrest and Medusa are around 5% higher after having been hit hard yesterday. Iluka has also bounced back strongly today, rising over 6%. Today’s jobs numbers were quite surprising, considering the below-trend growth, deteriorating corporate profitability and weak public sector hiring we have currently been experiencing. The better-than-expected data momentarily propped up the Aussie dollar, but this did not last long as weak import growth from China saw the local currency stutter yet again. It seems traders continue to prefer selling into AUD/USD strength.

www.igmarkets.com.au

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