IG Markets - Afternoon thoughts Oct 22

FTSE 5873 -23
DAX 7345 -36
CAC 3582 -23
IBEX 7838 -75
DOW 13327 -17
NAS 2678 0
S&P 1430 -3

Oil 91.75
Gold 1724

Asian markets are off to a subdued start to the week on the back of some soft leads from Friday’s US trade. Risk assets finished the week on a sour note with the moves mainly earnings driven, as reporting companies such as GE and McDonalds disappointed. Out of the 117 companies that have reported so far, 37% have beaten earnings estimates (below the historical average of 41%) and 21% have missed estimates (versus an average of 13%). Macro data was mixed with US existing home sales falling to 4.75 million, but coming in ahead of a consensus of 4.73 million. The EU Summit concluded with no major developments, and therefore failed to inspire market participants. Germany remains reluctant to rush the implementation of banking supervision, while France wants it done promptly. After a fairly flat start, risk currencies are off their lows but continue to struggle to get any real momentum in the absence of fresh leads.

Looking at the equities in the region, Japan’s Nikkei was lagging with a 0.9% drop after its trade balance figurers missed estimates. Japan’s trade balance came in at a deficit of 0.98 trillion yen, missing an expected 0.74 trillion yen deficit. The country’s exports missed estimates after a sharp drop in shipments to China. However, the yen has remained relatively steady with USD/JPY hanging around 79.35. The ASX 200 has shed 0.7% with the miners retreating after some big gains last week. Elsewhere, the Shanghai Composite has lost 0.6%, while the Hang Seng is a touch higher. Ahead of the European open, we are calling European markets weaker after the steep losses we saw in US trade. US markets are so far facing a mildly lower open with earnings once again in focus. Given the fact that Friday’s losses were mostly micro driven, with earnings dominating sentiment, we can only assume today’s earnings will play a big role on how the market performs. On the reporting calendar today we have Caterpillar, Peabody and Yahoo. Analysts feel Caterpillar may lower 2012 forecasts after recent commentary in September. Caterpillar shares slumped when it released that update and its earnings are widely used as a bellwether of economic conditions. FOMC member Pianalto will also be on the wires later today.

The ASX 200 is well off its lows but it seems most market participants are still happy to wait for a deeper pullback before piling into equities. The fact that Australia currently has contrasting fiscal and monetary policy probably doesn’t inspire much investor confidence in the current market environment. Comments from Treasurer Wayne Swan hit the wires this morning and caused limited volatility for the AUD. The government is implementing some measures to return the economy to a surplus in its budget review. FY13 GDP forecast has been revised lower to 3% (from 3.25%) with the surplus forecast down to around $1 billion. The government has also unveiled $16.4 billion in new budget savings over the next four years. We have a government that is fixated on tightening in order to deliver a surplus, while the Central Bank has been forced into an easing cycle to help the economy keep ticking along and supress the AUD. Apart from risk appetite ramping up and driving commodities and related currencies higher, it is difficult to justify further strength in the AUD from a fundamental basis. The dynamics in the local market suggest we will see a prolonged easing cycle and as a result selling the AUD into strength is likely to remain the preferred strategy. We continue to see red across the board in local equities, but there are some bright spots that deserve a mention. GrainCorp has jumped 40% and is trading at a 5% premium to the $11.75 per share offered by US grain handler Archer Daniels Midland. The premium suggests investors are hoping for a higher bid or potentially a rival bid emerging. GNC’s board is still reviewing the takeover offer. Sundance is also trading higher with a 5% jump after confirming Hanlong’s funding for the takeover. The banks have held fairly well after some negative comments from some of the brokers.

www.igmarkets.com.au

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