25/08/10 - 15:30
Ben Potter, Research Analyst
Afternoon thoughts from the Trading Room – 3.30pm
In Asia, regional markets are all lower following the weaker overseas leads, with Japanese stocks remaining under pressure due to a rampant yen. The Nikkei 225 is the worst performer, down 1.7% while the Shanghai Composite and Kospi are both softer by 1%. The Hang Seng is only weaker by 0.4%.
In Australia, the ASX 200 is currently 1.3% weaker at 4325.4, right on its lows of the day. The market had been quite resilient for most of the morning but has rapidly deteriorated in early afternoon trade, along with the rest of Asia. Losses for the day are both heavy and broad based with the heavyweight materials, financials, and energy sectors among the worst performers.
Whilst there’s still a lot of uncertainty regarding the hung parliament, the big driver at work at the moment is the global macro economic backdrop, which seems to be deteriorating. With the US earnings season now largely behind us, the focus is returning to the health of the US economy, which is clearly not benefiting the market given the recent slide in economic data.
There seems to be a growing acknowledgement that President Obama’s policies and stimulus packages have failed to gather traction in the most sensitive areas – we’re still seeing a depressed housing market and stubbornly high unemployment.
The big question on everyone’s minds is ‘what’s next’? There are talks of further stimulus extending the bush tax cuts or possibly even a sizeable cut to payroll tax to induce corporate America to hire.
Once the bulk of trader’s return to their desks after the Labour Day holiday on September 6, we’ll get a much better idea as to the market’s thoughts on the economy.
Despite the gloom, there are a few positives to note. The recent pickup in M&A activity and the excellent quarterly earnings season would normally be a catalyst for markets to move higher. The last and most crucial piece of the puzzle to fall into place is for a stabilisation and pickup in the macro economic backdrop.
Looking ahead to European trade
Looking ahead to Europe, yesterday's early losses on the DOW may have been significant, but it didn't mark the start of a sustained bout of selling. This was despite the rather depressing economic data we saw out of the US that once again paints a bleak picture for the country.
Despite Asian markets following the move lower, we're looking at a rather flat start in Europe as traders take stock of the move south. Nonetheless, it certainly seems too early to suggest that the bargain hunters are ready to move back in. Given the current mindset of risk aversion it seems somewhat unlikely that today's fundamentals can precipitate any significant change. However, German IFO data and US durable goods orders will both be under scrutiny.
The earnings calendar is relatively quiet too with little in the way of high profile reports due and with the long weekend approaching in London, the temptation could well be to hold off from any buying (however keen the price) until next week.
Ahead of the open we're calling the FTSE up 6 at 5162, the DAX down 3 at 5932 and the CAC down 1 at 3490.
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