IG Markets - Afternoon thoughts

IG Markets - Afternoon thoughts

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IG Markets - Afternoon thoughts

The PBOC’s decision to cut the RRR by 50 basis points effective May 18 2012, saw some positive sentiment filter through in Asian markets earlier on. This move was widely expected, and many analysts anticipate further easing following the downside surprises in the April macro data released last week. Clearly the fall in interbank interest rates since May suggests this was not a liquidity issue, and is more a gesture that Chinese officials stand ready to support as they change their growth model from export-led to one of domestic demand. Most of the markets in the region are now positive, with the Hang Seng and Nikkei both climbing 0.3%. European markets are facing a softer open, after having been quite resilient in Friday’s trading session. However, US markets are pointing to a flat to mildly negative open after having given up ground on Friday.

European markets will not only have to factor in the weak US close, but also a barrage of risk negative headlines, which suggests Greece is looking more likely than not to default on its future debt payments, as aid from the EU/IMF is withheld. The structural shifts in Europe are becoming more evident by the day, with peripheral countries rejecting the current, mostly capitalist governments that have worked so closely with core Europe in sanctioning harsh austerity measures. German voters on the other hand, have once again shown their anger at years of throwing good money after bad by voting against Angela Merkel, with her CDU party backing up lasts weekend’s regional disaster, with voters in the North Rhine-Westphalia region repositioning themselves to opposition party SPD. The SPD-Green coalition now controls 11 of 16 regions, and this cannot be a good omen for Angela Merkel’s prospects in the national elections in 18 months’ time. The fact that the Greek President has failed to form an eleventh hour united coalition is no major surprise, and makes the June 10/17 elections extremely interesting, and will keep a lid on gains in risk assets given anti-bailout party Syriza has the wind blowing against its back. Selling rallies in risk assets could be a potential way to make money in most asset classes, given the event risk is still very real this week. Eurogroup meetings over the next couple of days will centre on Greece, but perhaps on a positive note, we may see the contours of a growth pact which could co-exist with the fiscal compact.

The Aussie market shrugged off a fairly negative start for risk assets, and traded flat to positive for most of the session. The ASX200 is currently up just 0.1%, with telecoms leading the way, while the resources are struggling. The Aussie dollar’s weakness seems to have gone a long way towards supporting local equities and keeping the market above water. AUD/USD momentarily dipped below parity, printing a low of 0.99961 today. Dovish comments by RBA Deputy Governor Lowe contributed to AUD weakness. We have seen several analysts revise their targets for the pair, and downside pressure persists. It is good to see some relief for the retailers, with JB Hi-fi and Harvey Norman gaining ground as the easing cycle and weaker Aussie dollar help sentiment. Investors are also continuing to chase yield, with stocks like Telstra and Commonwealth Bank outperforming. Tomorrow we have monetary policy meeting minutes to look out for with the Aussie dollar largely in focus.
www.igmarkets.com.au
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