IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

FTSE 5811 -8
DAX 7294 -15
CAC 3516 -13
IBEX 7880 -30
DOW 12956 -54
NAS 2629 -11
S&P 1403 -6

Oil 87.98
Gold 1748

Asian markets are mostly firmer after picking up some positive leads from US and European trade. Regional equities were expected to get off to a strong start in response to the big gains in Friday’s US session. Risk assets rallied on Friday despite a shortened trading day on Wall-Street. There was nothing specific driving risk assets higher, but it generally seems investors are looking at the US and European situation with a glass-half-full approach. Of course there are still a few hurdles ahead with the European finance ministers meeting later today and fiscal cliff talks continuing. Despite the positive leads, Asian equities have been fairly subdued, suggesting some market participants remain fairly cautious with a small chance European finance leaders might have to postpone a decision on Greece yet again on the cards. Risk currencies got off to a fairly steady start to the Asian session, but have given up a bit of ground after a strong performance on Saturday. AUD/USD has retreated to 1.045 after having traded as high as 1.047 on Friday. EUR/USD is trading at 1.295 after pulling back from 1.3. However, the trend in the risk currency pairs remains positive and we are likely to see some key support levels help the price action along.

Looking at the equities in the region, the Nikkei is leading the way with a 0.7% gain. The BoJ released its monetary policy minutes which showed the board still largely favours further easing. The Japanese index has seen strong gains of late, clearly premised on the upside seen in USD/JPY. It is worth pointing out that 83.00 is a level which many Japanese exporters would have hedged, so we could see hedges being unwound on a sustained break. The physical market is lined with offers around here, but on the other side there are strong bids around 82.30, so the pair should be supported on dips. Elsewhere in the region, the ASX 200 has firmed 0.2% while the Hang Seng and Shanghai Composite are both relatively flat. Ahead of the European open, we are calling the major bourses modestly weaker. We are likely to see subdued trading until headlines from the finance ministers’ meeting start hitting the wires. US markets are also set to open weaker with no major data releases on the calendar. The US budget talks will dominate, and any signs that that congressional leaders are working together in a cohesive manor should support risk.

The ASX 200 has climbed 0.2% and is currently trading at 4423 ahead of the European finance ministers meeting later today plus the continuing fiscal cliff talks. Last week’s high of 4428 (in the underlying cash market) was the exact 38.2% retracement of the recent sell-off from 4581 to 4334, so a close above here could see the 61.8% retracement of the same move at 4487 come into play. Resource names are among the best performers after a solid session for commodities on Friday. BHP Billiton and Rio Tinto have gained around half a per cent each, while Fortescue Metals has climbed 3.8%. Gold stocks are performing well after the precious metal traded back above US$1750 on Friday. Kingsgate has surged 3.2% and Medusa Mining has firmed 3.5%. The banks are mixed, with ANZ (-0.2%) and Westpac (-1%) lower, while National Australia Bank (+0.2%) and Commonwealth Bank (+0.5%) are enjoying mild gains. Cabcharge has bounced 3% after enduring a sharp sell-off on Friday. The defensives are lagging with telecoms and healthcare sectors losing ground. CSL Limited has dropped 1.3% and Telstra has shed 1.1%. Telstra has rallied around 27% so far this year and might be in for a pullback in the short term, just like we’ve seen in other defensive names including CSL.

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