IG Markets - Afternoon thoughts

IG Markets - Afternoon thoughts

FTSE 5482 +8
DAX 6197 +36
CAC 3067 +20
IBEX 6565 +4
DOW 12570 -4
NAS 2546 0
S&P 1324 0

Oil 82.96
Gold 1609

Across Asia, markets are mixed as investors continue to trade cautiously ahead of a key week for Europe. Today’s subdued performance has come despite a solid rally for US markets. In US trade, we saw investors shrug off higher Spanish and Italian yields, and decided to focus on the prospect of further easing instead. However, in the Asian session, scepticism over European policymakers' ability to contain the debt crisis seems to be outweighing hopes of a concerted policy response that ultimately sees fiscally-strong eurozone countries stand behind the weak. With such conflicting schools of thought and some key event risk drivers on the way, we are likely to continue seeing markets trade in tight ranges, with plenty of positioning ahead of the weekend.

Taking a closer look at regional markets, the Nikkei is outperforming, rising 0.6% on the back of a softer yen. Also helping the Nikkei was data showing Japan’s machinery orders increased more than economists expected in April. Over in China, the Hang Seng has edged 0.3% higher and the Shanghai has climbed 0.8%. After a fairly strong start, Australia has turned lower with the financial stocks weighing on the market. The ASX 200 is currently 0.3% lower. After having missed out on the risk rally in US trade, European markets are facing a modestly higher open. However, US markets are facing a relatively flat open given the lack of fresh leads in the Asian session. Ahead today, we have French and German CPI, European industrial production and a German bond auction. In the US, we have retail sales, PPI, business inventories and crude oil inventories to look out for. As a result, there will be plenty of action in the currency markets.

A piece of news that was overlooked yesterday was Fitch following up last week's three-notch downgrade of the Spanish sovereign by also cutting the long-term ratings of 18 Spanish banks. The euro dropped on the headline, but quickly recovered. On a more positive note, Fitch noted that the €100 billion bailout package would be sufficient to shore up Spain's troubled banks. It doesn’t seem like Germany will change its negative stance on the introduction of commonly-issued eurozone bonds anytime soon, and ECB members supported the position arguing that this would only happen at the ’end of the long road to fiscal union‘. As a result, it seems several decisions are hanging on the outcome of the Greek elections. Investors are therefore facing a binary event with these elections. A rapid deterioration of eurozone conditions is also likely to be the determining factor for another round of QE at next week’s FOMC meeting.

Price action on the Australia 200 cash has been relatively uninspiring, with the bourse opening on its high of 4098 and finding sellers all-day to a low of around 4046. There is a severe bout of position adjusting ahead of the Sunday Greek election, which makes trading very difficult, with longs closing out to run a flat book in case of a Syriza victory, while shorts second guess whether something may eventuate that causes some relief in risk assets. The current technical set-up paints a neutral picture, and while fundamental traders scream out about the value argument, we still feel the weekly close below 3971, 1.8% away from current levels would suggest a deeper correction. On the stock front, Computershare was one of the best performers, rising 3% after maintaining guidance despite a tough environment in Europe. Whitehaven Coal has also been a standout, surging over 4% after coal magnate Nathan Tinkler made an offer for the company. Cabcharge has been one of the worst performers of the day, dropping over 10% after the RBA announced a variation to surcharge standards.
www.igmarkets.com.au

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