IG MaRKETS - Afternoon Thoughts

IG MaRKETS - Afternoon Thoughts

FTSE 6257 +29

DAX 7620 +30

CAC 3615 +14

IBEX 8021 +7

DOW 13967 +23

NAS 2750 +4

S&P 1511 2

Oil 96.11

Gold 1671

Asian equity markets are mainly firmer in afternoon trade after China’s current account data came in ahead of expectations. Overseas shipments increased by 25% year on year and saw the total surplus come in at $29.15 billion and beat consensus by 20%. With the new leadership group headed by Xi Jinping set to take power in a few weeks, China is seeking to sustain economic growth while containing inflation and excessive financial risks and after snapping a seven-quarter losing streak last month. With GDP rising to 7.9%, the ‘hard-landing’ analysts’ feared looks to be abating.

The Chinese data had a major effect on the Hang Seng and the ASX. Both jumped up on the news with the Hang Seng up 85 points in a 20 minute timeframe before easing. The Hang Seng was up 31 points to 23,212. The ASX jumped through a major resistance level of 4950 points on the Chinese data as BHP Billiton (+0.61) and Rio Tinto (+0.93) took up the slack with investors looking to cash in on iron exports to the world’s second largest economy. The ASX will close higher for the fourth straight week and will make it eleven out of the last twelve, showing investors are ignoring macro news as the index approaches our short-term target level of 4986 (which is the 50% retracement of the 2007 high compared to the 2009 GFC low). With earnings season having its biggest week starting Monday, this level will be seriously tested if most outperform. The ASX was up 0.55% to 4963 at 2.30pm (AEST). The AUD however has had a tough week and extended its losses yet again as the risk currency space reacted to ECB President Mario Draghi’s comments. AUD/USD was always in for a big week and we highlighted it as the key pair to watch. Having started the week trading at 1.045, the pair reached as low as 1.026 early in Asia today, but has since recovered to 1.029 on China data. Any recovery for the pair is likely to be used as an opportunity to sell as traders continue to price in the prospect of further rate cuts. The RBA’s statement on monetary policy released today confirmed its easing bias with sub-trend growth expected and unemployment rising through that period.

Japan was also in focus this afternoon as it too released its current account data. The figures were below expectations at ¥0.10 trillion versus a consensus view of ¥0.18 trillion. The most interesting observation upon its release was that USD/JPY was completely unmoved. The pair remains resilient around 93.63 level and has now passed the stage where economic data will make too much of a difference when the intentions of Japan’s leaders are well documented.

The Nikkei dragged on the region however, as Sony Corp posted an unexpected loss down 1.38% to 11,200 points. Sony fell 6.2%, making this its eighth straight quarter of losses and saw the company cut sales guidance for TVs, gaming devices and PCs even on the back of a weaker yen. The Sony result shows global consumer sentiment is still low as they continue to tighten their belts.

Overnight the ECB met in Frankfurt to discuss the region’s finances. Official rates were left at record lows of 0.75%, with Mr Draghi noting that ‘the exchange rate is not a policy target, but it is important for growth and price stability…We want to see if the appreciation is sustained, and if it alters our assessment of the risks to price stability’. These statements saw EUR/USD dropping to 1.339 in US trade after reaching a 1.371 early this week (the top of Goldman Sach’s long call from three weeks ago). The pair has treaded water during Asian trade and is currently resting at 1.3412 (+0.1%). But the euro will remain in focus later today as market participants monitor the wires for any further rhetoric regarding the euro’s strength and what it means for the region’s recovery. If Germany’s outperformance is anything to go by, some may be already pricing in the prospect of verbal currency manipulation, keeping the euro at bay. With the EU economic summit set to conclude, we wouldn’t be surprised to hear further comments around the euro issue. EUR/USD remains near its lows from US trade (1.337) and we feel there is significant downside risk for the pair in the near term.

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