IG Markets: Afternoon Thoughts

IG Markets: Afternoon Thoughts

FTSE 5339 -64

DAX 6342 -94

CAC 3044 -40

DOW 12445 -58

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S&P 1310 -7

Oil 91.16

Gold 1559

Across Asia, markets are weaker as concerns about Europe continue to spook investors. The negative momentum seen in the latter part of US trade has filtered through to the Asian session, with most of the cyclical sectors struggling. With the EU Summit set to take place later today, the price action suggests there is growing scepticism the meeting will yield a solution to the current crisis. Former Greek Prime Minister, Lucas Papademos’ comments warning of a Greek eurozone exit and Fitch’s Japan downgrade have certainly not helped sentiment at all. Even clarification from former Greek Prime Minister Lucas Papademos that there were no preparations underway in Greece for a possible exit failed to inspire any buying, given his previous remarks coincided with a strong sell-off on the S&P, and pushed EUR/USD to within 16 pips of Friday’s low.

It has been a big day for Japanese markets, with some key data being released and more to come later on. The BoJ kept its monetary policy unchanged and its trade deficit widened more than expected. The yen rose following the BoJ’s lack of policy change, and this weighed on Japan’s Nikkei which has lost 1.9%. Clearly the inflows into the JPY against the USD and crosses signalled that some traders had positioned themselves for more decisive measures. Elsewhere in the region, the Hang Seng has declined 1.6% and the ASX200 has shed 1%. After having finished yesterday’s session on a high, European markets will be greeted by a wall of sellers today, with losses of around 1% expected. US markets are also facing a weaker open.

There is plenty of action later today, with the EU summit likely to take centre stage. In the US, we have new home sales, and crude oil inventories to look out for. Keep an eye on Facebook as well given a drop below $30.40 would effectively see the company fall into bear market territory, not bad for four days trading! It seems investors are growing increasingly pessimistic ahead of the EU summit due to the uncompromising stance of German officials. Expectations seem to have been dwindled to an agreement on the broad outlines of a 'growth compact' focused heavily on structural supply-side measures that will be finalised at the EU summit on June 28 to 29. Investors were hoping for positive surprises on such critical issues as common-issuance eurobonds, deposit guarantees and bank recapitalisation options. The summit will likely be big on rhetoric, but fall very short on agreement should a growth pact be announce, it is something that has been well flagged and largely priced into markets.

The Aussie dollar took a big hit today, dropping to a six-month low of 0.97563 against the greenback. The local currency continues to be sold into strength and experienced a sharp reversal after having had a fairly good run in yesterday’s Asian session. Looking at risk currencies is normally a good indicator of what sentiment is like out there. A weaker Aussie dollar is meant to be fairly positive for the local market, but it can be a double edged sword as it often indicates a lack of confidence in global growth. With the current challenges the global economy is facing, it is difficult to find positives for local equities, particularly in the cyclical space. We continue to see our resource stocks struggling, with BHP Billiton (-1.3%), Rio Tinto (-0.9%) and Fortescue Metals (-4%) heading lower. Retailers have continued to experience their poor earnings cycle, with Myer delivering a profit warning which resulted in a 7% plunge in its share price. The sector is still struggling to find a bottom, and it is clear that the recent 50 basis-point rate cut and the big drop in the Aussie dollar will not solve the challenges that retailers are facing. On a more positive note, stocks with high US dollar/economy earnings exposure continue to outperform, with the likes of James Hardie, Resmed, CSL Limited and Newscorp holding up fairly well in the current environment.

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