IG Markets- Afternoon Thoughts 3 January 2013

IG Markets- Afternoon Thoughts 3 January 2013

FTSE 6038 +11
DAX 7773 -6
CAC 3723 -11
IBEX 8393 -55
DOW 13370 -43
NAS 2740 -7
S&P 1459 -3

Oil 92.70
Gold 1687

Regional equities are seeing a continuation of the buoyant risk environment in Asia today as investors react to the passing of the fiscal cliff deal. Although some analysts feel this is merely a relief rally as US leaders kick the can down the road so to speak, it seems to have done the job for now. The rally, which began in the afternoon part of Asian trade yesterday, extended through the European and US session. European and Asian markets rallied in anticipation of the bill being passed despite having encountered some uncertainty early in Asia. On the economic front, there was also a report showing manufacturing in the US expanded in December. The ISM manufacturing PMI climbed to 50.7 (from 49.5 a month earlier). Risk currencies mostly rallied in response to the fiscal cliff being averted, but have since shown signs of running out of steam. AUD/USD was one of the standouts as it jumped to a high of 1.0524, but has since retreated into the 1.049 region. USD/JPY remains steady above 87 where it seems to be forming a base. However, EUR/USD gave up significant ground from its Asian session highs. The pair fell sharply from a high of 1.33 and dropped all the way down to 1.316 where it is currently.

Some attributed the euro’s weakness to a disappointing eurozone manufacturing PMI reading which was revised down to 46.1 (from 46.3). All PMIs released from Europe showed that the economy is still far from getting back into growth/expansionary territory and this basically confirms some of the comments made by German Chancellor Angela Merkel earlier in the week. Others just attributed the move in the euro to some profit taking after it hit the 1.33 resistance. Traders will now be looking forward to another data dump from Europe today with Spanish and German unemployment change on the calendar. Although equities in the Asian region are generally firmer, price action in the risk currencies indicates that sentiment is subdued and the euphoria from the fiscal cliff deal has waned. With the Nikkei and Shanghai Composite closed, activity is limited in Asian trade. The Hang Seng has only managed a 0.3% gain, while the ASX 200 has climbed 0.5%. Without fresh leads to fan risk higher, we are likely to see profit taking kick in as market participants focus on some of the issues ahead like the debt ceiling, and lock in the significant gains from the past few weeks. Ahead of the European open, we are calling the major bourses weaker. US markets are also likely to shed some of yesterday’s hefty gains at the open. It will also be a big one for the US dollar with non-farm payrolls, unemployment claims and the FOMC meeting minutes all on the calendar.

The ASX 200 has advanced 0.5% and is currently trading at 4733 after having printed a fresh 19-month high of 4737.1. Once again the resource names are leading the charge with Rio Tinto rising 1.4% and Fortescue Metals climbing 1.8%. FMG continues to impress as it passed through $5.00 for the first time since July 2012 and has climbed 33% in four weeks on the back of news it will complete the Kings Development Project; FMG is currently trading at $5.02. The financial sector was one of the best performers in the US which has led to gains for banking stocks on the Australian market. CBA is the most notable stock, reaching its highest recorded level of $63.19 while ANZ is also following CBA’s lead up 0.3% to $25.27, its firmest level in six weeks. The defensive sectors are lagging with healthcare, consumer staples and utilities losing ground.

STAN SHAMU
Market Strategist

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