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- Soft Asian trade
- European market trekking US futures
- Banks drag on ASX 200
While Friday’s modest gains in US equities were driven by a glimmer of hope that leaders are getting closer, this seems to have waned over the weekend. House speaker John Boehner was quoted as saying he wouldn’t pass a bill to increase the US debt ceiling without addressing longer-term spending and budget challenges. This has really rattled markets and is likely to result in further near-term weakness for global equities.
While China is closed until tomorrow, the Hang Seng has dropped around 1% and perhaps this is an indication of what we can expect from Chinese markets tomorrow when they resume trade. We expect China to be playing catch-up to the losses we’ve seen in global markets since the government shutdown. However, at the same time it’ll be refreshing to get some fresh leads for regional markets. Japan has also been on the losing end today, with the Nikkei dropping 1% as the yen continues to appreciate against the greenback. USD/JPY is testing 97 as the flight to safety continues to benefit the yen. The ASX 200 held on to 5200 in early Asian trade, but has now slipped around 1%.
Weaker open for European markets
European markets are also pointing lower as the strains from the US government shutdown dampen sentiment. There are no major releases out of Europe today and direction for equities is likely to be centred around developments out of Washington. Despite all the political chaos, the S&P is only 1.6% off its all-time high of 1709. The fact that investors continue to buy up equities on pullbacks has actually driven volatility higher. As a result we don’t actually feel the recent spike in the VIX is a sign of panic, but rather an indication that investors remain resilient in the face of major headwinds.
With global markets on political watch, not many have actually noted that US earnings kick off this week. After a solid performance in the previous quarter, analysts are expecting to see further evidence of improving sales and earnings growth with cyclicals leading. It will also be interesting to see if financials can maintain the overwhelmingly positive earnings run rate from the previous quarter. No doubt estimates will be higher now and this could be a potential pit-fall this time round. The first major report will be on October 8 when Alcoa reports after-market.
US releases to be postponed
Just looking at the major risk currency pairs, we feel GBP/USD is testing attractive support levels after having streamed ahead recently. There was a sharp decline in the pair after encountering resistance in the 1.626 region. This was mainly due to profit-taking near the year’s high, but we are still eyeing buying the pair at lower levels given there is still uptrend support in place from July. The line comes in at around 1.60 and we would expect to see a bounce from there. GBP/USD has already tested 1.60 early in Asia and has found some buying in that region. The BoE will be on the wires this week with no changes in policy expected and potentially a more hawkish Mark Carney will prompt the pound higher again. The USD side of the equation will remain very confusing this week as investors juggle the US government shutdown and which releases will actually hit the wires. The FOMC minutes on Thursday are among the biggest releases of the week as they will give a bit more clarity on the Fed’s close no-taper call from the September 18 meeting. Keep in mind that some releases, such as retail sales, will be postponed with the shutdown in place.
Significant drop in local banks
It has been a quiet day for the local market, with NSW/TAS/SA closed for public holidays, resulting in thin volume. This has prevented physical buying/selling from underpinning equities and has resulted in exaggerated moves. The major banks have led the falls as the US debt limit situation threatens to cause strain in the credit markets. Meanwhile the miners have just been drifting through the session with some investors positioning themselves for China reopening tomorrow. The key release locally will be Thursday’s jobs numbers. However, the market is not really expecting miracles from this data as it is no secret the local economy has been hurting. In fact, we feel expectations of another rate cut have been well removed now and downside for the AUD is likely to be limited on local data.
GBP/USD uptrend still in place