IG Markets - Afternoon thoughts July 27

FTSE 5597 +24
DAX 6595 +12
CAC 3216 +9
IBEX 6362 -7
DOW 12907 +19
NAS 2586 +1
S&P 1363 +3

Oil 89.68
Gold 1616

Across Asia, markets are firmer on the back of some comments from ECB President Mario Draghi today. Mr Draghi asserted that the ECB is ready to do whatever it takes to preserve the euro. This triggered a short squeeze which sent EUR/USD beyond the 1.23 level. However, the pair has sidelined in the Asian session and is currently consolidating just below 1.23. Other risk currencies like the Aussie dollar have had similar price action today, with a bit more positive momentum due to their high yielding nature It seems the ECB has come out on the offensive in recent days, causing a sizeable short-covering rally in many different asset classes. Yesterday we mentioned comments from Ewald Nowotny, and subsequently it was the ECB President’s turn to install modest confidence.

Looking at the equity markets in the region, Japan’s Nikkei is 1.2% higher, the ASX 200 has climbed 1% and the Hang Seng has surged 1.8%. Asian markets haven’t quite mirrored the gains seen in European markets, with a lack of fresh leads to spur risk assets further. As a result, European markets are facing a relatively flat start to the session. US markets are also facing a relatively flat start with some mild gains likely. Yesterday’s US data did little to temper the perceived risk of further Fed easing as early as next week. On the US corporate earnings front, results were mostly positive, with 3M beating estimates. However, Facebook disappointed and the stock will be in focus again today after its poor showing.

In US trade we get Q2 GDP (consensus is 1.4%) and core PCE (consensus 1.8%), where any readings below consensus will feed into a weaker USD, especially given we have the FOMC meeting next week. Over in Europe, Spanish unemployment is likely to be the highlight. Spain’s unemployment is expected to creep up to 24.7% (from 24.4%). There is also German CPI to look out for. We wouldn’t rule out the possibility of some comments from European officials after the headlines that we’ve already seen this week. It was perhaps the determination in Mario Draghi’s voice that really scared euro shorts off, and left most in the market wondering what exactly they are likely to do. It seems most now believe they will resume buying bonds in the secondary market under their SMP (Securities Market Programme), with the idea to bring down yields. We also know that the ECB will have to deliver at its central bank meeting next week. Simply cutting its refinancing rate is not going to be enough; it will need to announce something more substantial, or the euro runs the risk of getting smashed.

The local market managed to edge higher through the session, setting itself up for a positive finish to what has been a very volatile week. At current levels (4191), the ASX 200 is not far off breakeven for the week, which kicks in at 4199. A close above 4199 would be an ideal set up for next week’s trading. Unfortunately, the price action for the index faces some stiff resistance in the current zone, with the 100- and 200-day moving averages being tested. The resource majors have made significant progress today after having started the session on a subdued note. BHP Billiton is up 1%, Rio Tinto has risen 2.5%, while Fortescue and Newcrest have each surged over 3%. The defensive sectors have underperformed today, with utilities and telecoms lagging the market.

www.igmarkets.com.au

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