IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

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Across Asia, markets are firmer despite some mixed leads from European and US trade. EUR/USD and EUR/JPY were nicely supported in early European trade on comments from ECB member Ewald Nowotny. Mr Nowotny commented that ‘there are pro arguments’ in favour of granting the ESM (European Stability Mechanism) a banking licence, which in turn could access cheap funds from the ECB and buy Spanish bonds in the secondary market, with the idea to drive down borrowing costs. These comments are extremely interesting given we feel granting a banking licence to the ESM is seen as one of two solutions to the European debt crisis or at least the symptoms, the other being changing the ECB’s mandate so that the ECB can print money and buy bonds to bring down yields.

Looking at the equity markets in the region, Japan’s Nikkei is 0.3% higher, the ASX 200 has climbed 0.5% and the Hang Seng is relatively flat. Although we are seeing fairly positive price action in the Asian region, US and European markets are facing a fairly mixed open. European markets look set to open relatively flat, although it really is anyone’s guess how they will finish up. Fixed income markets may offer some direction, and hopefully the huge move lower in front-end Spanish yields will continue. However, many will say that the higher the yield, the closer we are to a potential change of mandate for the ECB or perhaps the banking licence for the ESM, which Mr Nowotny sees logic in

We find it quite positive that the ECB seems to be at least thinking about these steps, although it is no way reflecting the wider central banks’ opinion, as it is only his personal view. Mr Nowotny should be listened to though, as he is seen as a bit of a visionary within the Bank, recently putting forward the argument that the deposit rate should be cut to zero well before the July action. It also seems as though the ECB is warming to new policy initiatives, where only recently we heard from Mario Draghi and ECB members Mr Knot and Mr Coeure about the need for the ECB to overcome old taboos. Data is relatively light today, with US durable goods the key release, and weekly claims also in focus. In Europe, we get M3 money supply and Italian retail sales, but neither should rock the boat too much, while Italy will also tap the market in a bill and zero coupon (two-year) bond auction. On the earnings side, Exxon will be interesting, given the huge fluctuations in energy prices of late, while Pulte homes will need to justify its huge outperformance with a number probably north of 6 cents (Q2 EPS). The companies’ views on orders growth and mortgage put-backs will be also closely watched.

It was a busy day for the local market with some key company announcements being released. Qantas has been the biggest mover of the day, rising nearly 10% on reports suggesting it is close to a tie-up with Emirates. Its international arm has been struggling and should this tie-up go through, QAN could see some of this pressure relieved. Another big mover was Newcrest Mining which rallied yesterday ahead of its production report. Although the miner delivered on expectations, we saw a classic ‘buy the rumour, sell the fact’ as the stock gave up most of its early gains. Gold stocks will be in watched closely over the coming sessions as focus of the markets is quickly shifting to central bank response to slowing global economies and the intensifying eurozone sovereign debt crisis. Gold prices are generally supported by this. Caltex shares have climbed 1.5% after it announced a supply chain restructure which will see it shut down some refineries.
www.igmarkets.com.au

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