Global Markets Overview – 5/15/2012

Last night it was a case of 'same story, different day'. Despite ongoing negotiations between the various political parties to cobble together a coalition government, an agreement failed to be reached, making fresh elections next month the most likely scenario. With repeat elections predicted to lead to a socialist/anti-bailout biased government, fears have intensified that a Greek exit from the European Union is on the verge of becoming inevitable. Some have predicted such a scenario would amount to a 'Lehman-like event' and have a cataclysmic effect on global markets.

Also weighing on sentiment is a concern over the robustness of the Chinese economy. While inflation pressures have eased in China, paving the way for more easing from the PBOC, the market's concern is with China's slowing growth profile. For some reason, the market seems to focus on the negatives with China. It often views China in a pessimistic, half empty manner. It will continue to do so and will continue to be wrong.

With such concerns dominating the global mindset, it is little wonder that risk assets have come under heavy selling pressure in recent weeks. We now have a scenario where the euro is just hanging onto the 1.28 level (having previously looked comfortable above 1.30), the AUD has now dipped below parity for the first time since December 2011 and cash is flowing into perceived safe-haven currencies such as the USD and yen. Equities are also losing out to bonds.

All of this negativity and risk aversion sets us up for another pretty soft start to the day, with our opening call being for the market to unwind approximately 40 points or 0.9% at 4257. It's hard to believe that just two weeks ago, after the RBA's 50 basis point interest rate cut, we hit 4448, and everyone was talking about the local market's momentum and how we were on the verge of a significant breakout to the upside. How quickly things can change, and what a timely reminder of how the simmering tensions in Europe can flare up at any time!

It should be of no surprise that today's losses are likely to be led by 'risk-off' cyclical names across the material and energy sectors. With China slowing and European GDP data due out tonight expected to show Europe slipping back into recession, base metals and energy prices have been on the slide. BHP's ADR is pointing to a fall of 1.8% on the open to $33.84, down below that key technical support level of $34. With BHP likely to pace declines amongst the major miners and crude oil prices continuing to fall (last night down 1.4% to $94.15), the outlook for the local market is bleak. While broad-based losses are probable, pockets of relative strength are likely to be found in defensive sectors such as telecoms, healthcare and utilities.

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