IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

FTSE 5601 -21
DAX 6360 -32
CAC 3117 -10
IBEX 6782 -14
DOW 12783 -41
NAS 2611 -12
S&P 1351 -5

Oil 80.32
Gold 1602

Across Asia, markets are mostly weaker after some disappointing economic data from China. HSBC’s manufacturing PMI number came in at 48.1, weaker than the previous month’s 48.4 reading. Sentiment had already been fairly subdued following the FOMC meeting, where the Fed decided to extend its Operation Twist programme by $267 billion through to the end of 2012. This essentially buys the Fed some time as the European situation continues to unfold. Investors were disappointed that Fed chief Ben Bernanke did not signal that QE III was on the way. Sentiment also dampened after the Fed cut estimates for economic growth on the back of a slowing jobs and tough credit markets.

Risk currencies with close ties to China economic growth, like the Aussie dollar, have retreated from seven week highs following Chinese data. AUD/USD was trading at near 1.02 and has since pulled back to around 1.016. Equity markets in the region have also retreated, with the ASX 200 losing 0.8% and dipping below 4100 for the first time since Monday. Hong Kong’s Hang Seng has dropped 0.9% and the Shanghai Composite has declined 1.6%. Japan’s Nikkei has bucked the trend and is 1.2% higher after the yen weakened against the US dollar. USD/JPY pushed further north as the Fed failed to initiate a QE3 programme and expand its balance sheet, preferring to extend ‘Operation Twist’.

Following the slump we have seen in the Asian session, US and European markets are facing a weaker open. It clearly seems that traders were not just positioned for an extension of the ‘Operation Twist’ program, but also a shift in the Fed’s balance sheet composition and even an expansion of its balance sheet (QE3) itself. The Fed did lower its economic projections with 2012 real GDP expected at 1.9% to 2.4% (from 2.4 to 2.9%) in April), while unemployment this year is expected to be between 8% and 8.2% (up from 7.8% to 8%). There were also some big changes to core PCE (the Fed’s preferred reading on inflation), however as we have written in recent reports, these changes don’t surprise us at all given the deterioration in recent data. Later today, we have plenty of data from Europe, with flash manufacturing and services PMI due out. In the US, we have unemployment claims, manufacturing PMI, existing home sales and the Philly Fed manufacturing index. With so much talk about growth still dominating markets, all this data makes for an enticing session. Risk assets are in for a volatile session with so much on the calendar.

The reaction in gold was understandable, pulling back to $1590 from $1606 just before the meeting, before buyers stepped in to push the commodity back above $1600. Some of the impetus to buy gold has been removed and some of the speculative community will look at other assets to trade in the short term, however it is clear that worse-than-expected data and perhaps further fallout in Europe will see traders look to push gold higher on the hope that the Fed will print money further down the line. We still feel that we want to see a sustained break above $1627 before we get more bullish on gold.

Locally, the resources have really lagged the rest of the market. They were already facing a tough session following a poor performance in the commodities space, particularly oil and gold. The losses extended following the disappointing China economic data Among the worst performers are Woodside Petroleum (-2.7%), Santos (-3.8%) and Newcrest Mining (-3.4%). The defensive sectors have outperformed with some gains in the telecoms and consumer staples space. Telstra (+0.6%) and Wesfarmers (+0.4%) are both trading higher.

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