IG Markets: Afternoon Thoughts

IG Markets: Afternoon Thoughts

Across Asia, markets are weaker as a report from the news agency Xinhua quashed expectations of fresh large-scale stimulus from China. Yesterday’s Asian session had seen risk assets get a lift on increasing optimism of policy action by Chinese officials. Domestic reports have been circulating, suggesting that new stimulus measures are being discussed. The drop in the euro is certainly the highlight, with some attributing it to Egan-Jones cutting Spain’s credit rating. There are also reports suggesting the ECB has rejected Spain's plan to finance the recapitalisation of its banking sector via the direct injection of sovereign bonds. US markets returned to trade on a positive note, with some solid gains across the board. However, there was some disappointing economic data as consumer confidence missed expectations.

Hong Kong’s Hang Seng is the weakest performer in the region, slumping 2%, while the Shanghai Composite is only 0.2% lower. Elsewhere in the region, Japan’s Nikkei is down 0.8% and the ASX 200 has dropped 0.6%. A mildly stronger yen on the back of some positive BoJ comments seems to be weighing on the Nikkei. Following the weakness we are seeing in the Asian session, European and US markets are facing a softer open. The FTSE and CAC are likely to open around half a percent lower while the S&P 500 is facing a 0.3% fall. Ahead today, we have US pending home sales data, while the ECB’s Mario Draghi and FOMC member Dudley will all speak. Looking ahead to the European session, reports that the ECB has rejected Spain's plan to finance the recapitalisation of its banking sector via the direct injection of sovereign bonds will be a talking point. The move raises the prospect of increased Spanish sovereign issuance at a time when investor demand for Spanish paper is waning. As a result, risks would still seem to be heavily skewed against the euro.

The local market gave back most of yesterday’s gains at the open today as the resources swiftly turned villains after China dismissed the stimulus speculation. BHP Billiton is down 0.5%, while Newcrest Mining has declined 3%. Fortescue Metals has erased earlier losses and is up a touch. The highlight of today’s session was the Aussie dollar slipping below 0.98 against the greenback on the back of the retail sales numbers. They fell 0.2% in April versus a rise of 0.2% expected, while the value of building work completed dropped 0.5% in Q1. With data continuing to disappoint, it wouldn’t be surprising if the RBA downgrades its growth forecast again in the coming months. Surprisingly, the retail stocks didn’t have too much of a negative reaction to the news, with JB Hi-fi actually trading higher. Some of the other bright spots were Programmed Maintenance, which surged over 4% after posting a solid FY12 report and forecasting growth for FY13. The company seems to have a fairly solid business model, which has helped it to overcome a challenging operating environment. Perhaps another positive that can be taken out of today’s session is the fact that the market is well off its lows. On the economic front, tomorrow we have building approvals, private capital expenditure and private sector credit data due out.

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