IG Markets - Afternoon thoughts July 11

Across Asia, regional markets are all lower after another weak US session predicated on global growth concerns and a series of US corporate earnings downgrades. The Nikkei is the region’s worst performer, lower by 0.5%, while the Kospi is weaker by 0.4%. Elsewhere, the Hang Seng and the Shanghai Composite are down by 0.3% and 0.2% respectively.

In Australia, the ASX 200 is currently 0.1% weaker at 4094, well off its earlier session low of 4076. With investor sentiment decidedly bearish at the moment, it is not surprising to see cyclical growth sectors such as energy, industrials and materials as the day’s biggest losers, nor the defensively-orientated telecoms and consumer staples sectors as two of the session’s few winners.

Overnight, the USD continued to see safe-haven money flows, with the dollar index hitting its highest levels since August 2010. This again resulted in weakness across the base metals and broader commodities complex and led to downwards pressure on materials and energy names. At present, the market is certainly not trading as if it expects more QE from the Fed any time soon. A sharply stronger dollar, and corresponding weakness across the gold, crude and base metal markets, is hardly what you’d expect to see if the market was anticipating more QE. That said, the drums are beating and at some point, should US economic data continue to move in the wrong direction, the Fed will be forced to act. On that basis the market could be setting itself up for the mother of all snap-back rallies, particularly if the Chinese can come to the party and show it is willing to reposition its economy on a stronger growth trajectory. Friday’s Chinese GDP print will be crucial to sentiment, as will each and every outlook statement handed down during this month’s US corporate earnings season. The Fed will no doubt be keeping a close eye on both.

www.igmarkets.com.au

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