IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

Across Asia, markets are mostly weaker after JP Morgan’s post-market share price drop set the tone for the region’s session. In US trade, markets fell dramatically following the close as JP Morgan shares traded 5% lower due to a surprise investment loss in its investment arm. Sentiment had somewhat improved earlier on in the absence of any nasty headlines out of Europe. There are hopes that Pasok party leader Mr Venizelos will be able to forge a coalition with the New Democracy and Democratic Left, a set-up that would command a majority of 168 of 300 seats. This lifted sentiment as it would help Greece avoid a second election.

The main event in Asia has been some economic data from China. Consumer prices rose 3.4% in April from a year earlier, moderating from a 3.6% gain in March. This was in line with consensus and below the government’s target for a third month. As a result, the data gives China room to ease policy to stimulate the economy. On the other hand, PPI fell a worse-than-expected 0.7%, posting the first back-to-back decline since 2009. We still have fixed asset investment, industrial production and retail sales to come. The Hang Seng is 1.2% lower and the Shanghai Composite has dropped 0.3%. Elsewhere in the region, Japan’s Nikkei has shed 0.5% and the Aussie market is down 0.2%. After having traded ‘risk on’ yesterday, European markets are facing a weaker open as they catch up to the losses being seen across Asia. US markets are also looking to continue the slide they experienced into the close, with modest losses expected at the open.

The next couple of days are going to be critical in the ‘Grexit’ (Greek exit) debate, as traders watch closely to see if Pasok party leader Mr Venizelos can forge a coalition. For Greece to stay in the European Monetary Union (EMU), the support of the Democratic Left to Pasok is vital. While it seems the party is seeing the risks of not giving its support to Pasok, we are sceptical it will fully endorse the bailout in its current form, and may ask for it to be re-negotiated. Comments from European officials have suggested it is not going to play ball, or negotiate any proposed changes in the terms imposed on Greece in return for the tranches of aid from the second bailout. However, we suspect when faced with the prospect of an exodus of risk assets, it may back down. It is also clear that if Pasok can’t form a coalition, then a caretaker government will be formed and a second election, potentially on June 17, would see anti-bailout party Syriza poll much better with momentum clearly on their side. Ahead today in the US, we have PPI numbers and a consumer sentiment reading due out.

After a fairly promising start, the local market failed to hold on to the 4300 level and succumbed to downside pressure shortly after the open. The resource stocks swiftly turned villains with BHP Billiton trading 0.7% lower, after having been pointing to a 0.8% advance at the open. However, the gold miners continued to outperform today, with Newcrest +2.6%, recovering from the massive slump it had experienced earlier in the week. Defensive stocks are outperforming with gains for healthcare, consumer staples and utilities helping to limit the downside. Based on current prices (4287), the Aussie market is down around 2.5% for the week.

www.igmarkets.com.au

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