IG Markets Afternoon thoughts

IG Markets Afternoon thoughts

FTSE - 5426: -6
DAX - 6123: -18
CAC - 3033: -10
IBEX - 6481: -35
DOW - 12444: +33
NAS - 2526: +9
S&P - 1313: +4

Oil: 82.16
Gold: 1592

Across Asia, markets are mostly weaker after the rally on the back of Spain’s bailout lost steam. Risk assets showed initial support to the Spanish bailout yesterday with equity markets starting the week off on a strong note. The sharp move higher lost steam in the European session however and risk assets pared some of their gains. It is reassuring that concrete steps are now being taken to address the banking system's capital shortfall. However, there is still some scepticism as any external funds provided will still lead to an increase in Spain's debt-to-GDP ratio. The euphoria also waned as the reality that Spain needs to be rescued escalated fears that the Eurozone sovereign debt crisis could deepen.

Taking a closer look at regional markets, the Nikkei is the worst performer, declining 1% on the back of a stronger yen. Japan’s currency is benefitting from investors positioning for an extended period of risk aversion which generally favours safe-haven flows. A stronger yen is negative for Japan’s equities. Over in China, the Hang Seng and Shanghai are each around 0.8% lower. Australia returned to trading after a holiday yesterday. Having missed out on yesterday’s rally, the ASX 200 has climbed 0.4% today. After having held their ground reasonably well yesterday, European markets are facing mild losses at the open. However, US markets are facing modest gains after having been sharply sold off into the close. Ahead today, we have the US Federal budget balance and import prices data.

News over the weekend that Spain would receive €100 billion in aid for bank recapitalization supported risk assets early on but concerns over the upcoming Greek elections remains at the forefront of investor’s minds and we’ve seen risk assets give back yesterday’s gains. If Greece's pro-bailout parties again fail to form a government, a disorderly default will be on the cards. Yesterday’s move lower was sparked by some of the moves we saw in the bond markets. The Spanish sovereign bond market ultimately reacted negatively to the bailout announcement and Italian bonds also came under significant selling pressure with the 10year yield rising by 26bp to close above 6.0%, the highest level this year. As a result, investors will continue to monitor bond markets closely for an indication of sentiment going forward. Concern that the ESM's preferred creditor status could trigger a CDS event if this vehicle is used to fund the bailout will also be something to look out for.

The local market has managed to hold on to its early gains and is outperforming the region today after missing out on yesterday’s rally. Despite the positive economic data out of China, the resources have disappointed today with BHP Billiton (-0.7%) and Rio Tinto (-1.6%) both trading lower. Aquarius platinum has plunged over 7% after shutting down a mine due to the enduring low platinum group metals price environment. All the big banks posted modest gains which helped to support the market today. Industrials are among the best performers supported by Qantas which has surged over 14% after ruling out a capital raising. Ten Networks resumed trading after its capital raising and the stock is trading down 19% at 52 cents, just above the execution price of its entitlement offer at 51 cents. It is a pretty quiet week on the local economic calendar front but there will be plenty of action from Europe with some key event risk drivers on the way.

www.igmarkets.com.au

ENDS

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