IG Markets - Afternoon thoughts

IG Markets - Afternoon thoughts

FTSE 5428 +44

DAX 6144 +50

CAC 3087 +29

IBEX 6479 +60

DOW 12442 +27

NAS 2552 +6

S&P 1317 +2

Oil 85.35

Gold 1621

Across Asia, markets are rallying on hopes of a Spanish bailout and optimism that global central banks will take further action to bolster slowing global growth. Some traders simply attributed the move to short covering, as nothing concrete was actually announced. Hopes for strong Fed action were lifted by comments from the Fed's Lockhart who said it might need to consider more easing if the US economy falters. Reports indicating that European officials are pondering a bailout programme for Spain that would focus on the banks and only impose "very limited conditionality", without any heavy-handed austerity measures, saw the euro and other risk assets rally.

Taking a closer look at regional markets, the Hang Seng has surged 1.4%, the ASX 200 has risen 1.3% and the Nikkei is 0.9% higher. After having had a pretty strong day yesterday, Asian markets are not quite mirroring the rallies seen in European and US bourses. We haven’t really had any fresh leads in today’s Asian session, but futures have continued to drift higher as optimism grows ahead of a key couple of days for markets. Some of the European markets are pointing towards advances of around 1% at the open, whilst US markets are facing gains of around 0.3%. The policy spotlight now shifts to the BoE, where the majority of analysts are looking for a 'no change' verdict this month, but a QE expansion still looks likely by August. The Fed's Beige Book did not offer anything materially new for the doves, ahead of the comments from the Fed's Yellen and Bernanke's testimony. A downgraded economic assessment might be served up by the Chairman, but the likelihood of further easing still looks slim.

Although the ECB kept rates on hold as expected, there were some interesting comments from the Central Bank. Mario Draghi announced that the ECB will continue its three-month refinancing operations until at least the end of the year, and that a ’financial markets union‘ could be announced as a viable short-term measure. This triggered a rally in the euro and other risk assets. Focus tonight will be on the Spanish bond auction. Spain's Treasury Minister said on Tuesday that the country is losing access to credit, and called for institutional help for its financial sector. We have seen Spanish yields cool over the past few sessions, which is a positive sign going into the bond auctions. Two-, four-, 10-year bonds will all be auctioned. 10-year yields in Spain reached 6.6% last week, but have dropped back to 6.25% given the very strong rally in asset markets overnight in response to the ECB saying that it would continue to provide liquidity, and two Fed speakers saying that they are prepared to take even more policy action to boost the erratic US economic recovery. There are also French bond auctions to look out for.

The highlight for the local market today was the jobs numbers. Australian employment surged by 38,900 in May to beat all expectations, another sign of economic resilience that sent the local dollar up sharply and forced the market to further scale back expectations of aggressive rate cuts. Many analysts and economists remain perplexed by the pick-up in employment outcomes relative to a range of other indicators on activity, profitability, and confidence, that all suggest a more subdued environment. The spike in the Aussie dollar has overshadowed the move in equities today, as AUD/USD printed a high of 0.99671 leaving it a touch below parity. On the equities front, Woodside Petroleum is having a solid day, rising 1.4% after receiving a broker upgrade this morning. Gold stocks underperformed today after gold prices retreated as investors got more bullish on risk assets. New crest and Medusa Mining are both weaker.

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