IG Markets: Afternoon Thoughts

IG Markets: Afternoon Thoughts

Across Asia, markets have bounced today, shrugging off fairly mixed leads from the European and US sessions. Most flows skewed to USD selling on some marginally positive headlines and decent price action from other risk markets. Optimism that a pan-European roadmap towards a banking union would emerge in coming weeks seems to have lifted sentiment. It is a big week for policy makers across the globe, and there is a sense that we could see some action starting with the Reserve Bank of Australia today. The ECB meets tomorrow and is expected to remain on hold for now.

Taking a closer look at regional markets, Japan’s Nikkei has added 0.6%, while Hong Kong’s Hang Seng has climbed 0.7%. Elsewhere in the region, the Shanghai Composite is flat, but the ASX 200 has jumped 1%. Cyclical stocks have been generally buoyant today, as risk assets enjoy a minor recovery. As a result, European markets are facing mild gains at the open today. However, US markets are facing a relatively flat start to the session. Finance ministers and central bank governors from the Group of Seven countries hold a call today to discuss Europe’s debt crisis. Apart from the G7 meeting, we also have European final services PMI, retail sales and German factory orders. The UK will be out yet again today for the Queen’s Jubilee. It seems Europe’s escalating debt crisis could nudge the Fed closer to more bond buying or extending ’Operation Twist‘, the US Central Bank's most recent program to lower long-term borrowing costs. Ahead today, we have ISM non-manufacturing PMI in the US.

As expected, the RBA cut rates by 25 basis points to 3.5% today, citing a slower outlook for the domestic and global economies. The forward policy guidance and commentary will be closely scrutinised given the recent sharp downgrade to global growth expectations. At first glance of the statement, it seems like the RBA is taking a wait and see approach and today’s move was perhaps a token rate cut. Given in the statement the RBA sees inflation as fairly subdued, it seems the 25 bp cut has seen the Bank move to a policy of least regret and they have been forced to set policy on predominantly external influences.

The move didn’t result in much of a reaction in the local market or the Aussie dollar. The scenarios that could have caused some movement would have been no change, or a 50 basis point cut. Regardless, the cut will bring some much needed relief to borrowers and some of the consumer sensitive sectors. Bank of Queensland has been the first of the banks to react, cutting rates by 20 basis points. Hopefully we can see the other banks follow suit. Today’s gains in the local market were led by resource stocks, with the energy sector in front. A bounce in oil prices has helped Woodside Petroleum surge 4% today. Qantas has been the main story of the day, plunging 19% on the back of a profit warning. The defensive sectors underperformed, as the telecoms and utilities both lost ground. Although the market had a positive day, the move was not all that convincing as the 4050 region presented stiff resistance. With plenty of event risk on the way this week, there are plenty of potential catalysts which will see some important levels tested.

Please contact IG Markets if you require market commentary or the latest dealing price.

www.igmarkets.com.au

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