IG Markets - Afternoon Thoughts

Good afternoon,

FTSE 5503 +12

DAX 6251 +3

CAC 3072 +6

IBEX 6515 -5

DOW 12749 +7

NAS 2595 +2

S&P 1346 +1

Oil 83.40

Gold 1629

Across Asia, markets are mostly weaker after Spanish bond yields rose to worrying levels. Regional markets had a strong rally yesterday, as investors cheered the Greek election results. Some are now feeling that the results were a bad outcome as they reduce the chances of seeing coordinated action by the central banks, while kicking the can down the road as far as Greece issues go. Spanish 10-year yields traded above 7.15%, a euro-era record, as investors look ahead to Thursday's auction, the first since Spain requested external assistance to help recapitalise its banking sector.

Taking a closer look at regional markets, the Nikkei and Hang Seng are around 0.3% lower each in a fairly subdued session. Australia’s ASX 200 is also down 0.3% after coming off its lows, while the Shanghai Composite has dropped 0.5%. After yesterday’s gains, it seems markets are just happy to consolidate while awaiting further developments on the European front. Despite the subdued price action we have seen in the Asian session, European markets are facing mild gains at the open while US markets are likely to open relatively flat. Ahead today, we have German ZEW economic sentiment to look out for. In the US, there are building permits and housing starts data.

The Bank of Spain reported that deposits in the Spanish banking sector dropped by 2.52% in April from March and the bad loans ratio rose to 8.72%. Given the fragile risk sentiment at the moment, investors are not taking the moves in the fixed income markets lightly. As a result, Spanish bill auctions later today will be a key event ahead of Thursday’s bond auctions. With Antonis Samaras, leader of New Democracy, in talks with his counterparts in SYRIZA and PASOK to build a coalition government, many feel this could be a source of volatility. The head of Euro working group, Thomas Weiser said that EU cannot make further Greek disbursements until the Troika completes its review this month-end. As a result, it seems caution is still warranted despite the completion of the Greek elections.

The local market has come off its early lows today and is just a touch weaker. The more impressive story has been the rise of the Aussie dollar, which has managed to stay at elevated levels despite the pullback in the euro. AUD/USD has had some support from the RBA’s comments in this morning’s minutes. The RBA signalled it may sit pat for now saying the impact of recent cuts, amounting to 75 basis points since May 1, will flow through to the economy in coming months. Resources and other cyclicals are mostly weaker, while the defensive sectors are outperforming. There have been a few standouts with Fairfax dropping 7% and giving back yesterday’s gains. Latest reports suggest Gina Rinehart has asked for three board seats and the right to make editorial decisions. Lynas has been among the best performers of the day, surging 7% on the back of a favourable ruling in Malaysia.

Kind regards,

Stan Shamu

Market Strategist

IG Markets

www.igmarkets.com.au

ENDS

© Scoop Media