IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

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Asian markets are mixed with some consolidation following the recent move higher. After a big rally at the end of last week, we finally saw risk assets pull back. There was no specific reason for the subdued risk environment, but it seems some concerns surrounding Europe were part of the reason why markets struggled. EUR/USD managed to hold above 1.31 during US trade, even as Spanish yields continued to inch higher. German Chancellor Angela Merkel noted that it is unlikely that the single banking oversight will be functional by January 2013 and added that it is more important to take ’credible steps’ than ‘act quickly’. It appears that markets have to wait longer than expected to get clarity on Greece, Spain and the banking supervision. This continued delay could put downward pressure on the euro and other risk assets.

FX markets have been confined to fairly narrow trading ranges with limited data flow on the calendar. This has been the case with EUR/USD and AUD/USD in the Asian session. Looking at the equities in the region, the Hang Seng and ASX 200 are both relatively flat. Japan’s Nikkei is also relatively flat after returning to trade from yesterday’s holiday. USD/JPY continued to march higher ahead of the BoJ’s two-day policy meeting which commenced today. Some blame concerns a dispute between China and Japan is worsening for the moves in Asian equities. European markets are facing a mildly weaker start, while US markets are likely to open flat. There is no major economic data due out of the US today, but the current account figures deserve some attention.

The news flow in Europe has turned less positive. Spanish bonds have struggled since Friday after Spain's Economy Minister Luis de Guindos noted that the government will put forward a ’new set of reforms to boost growth’ indicating that Spain wants to convince the EU leaders that it does not need a bailout program. ECB Governing Council member Coene noted that if ’markets see that Spain will not’ ask for an EU aid, ’spreads will rise again’ and reiterated that the ECB will not buy bonds unless the Spanish government makes a formal aid request. Mr Coene acknowledged that the OMT programme is designed only ’to buy time’ for structural reforms to take effect. As a result, Spain news will be solely monitored and could be a source of volatility for the single currency. On the economic front, we have economic sentiment data out of Europe later today.

The local market opened mildly lower today, but has since clawed back and is currently around breakeven. Cyclical stocks underperformed all day with some of the resource names pulling back. Fortescue Metals returned from its trading halt with a bang, rallying over 20% after announcing a new US$4.5 billion credit facility. This provides increased balance sheet capacity and security for the company's proposed expansion in the face of iron ore price volatility. Peers BHP Billiton (-0.8%) and Rio Tinto (-0.3%) are both mildly weaker today. Macmahon Holdings remains in a trading halt and industrials like Boart Longyear, Leighton Holdings and Monadelphous are around 2% lower. Gains have mostly been in the defensive space for a change today with telecoms, utilities and healthcare sectors in positive territory.

www.igmarkets.com.au

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