Global Markets Update – 12/20/12

After having had a strong run in recent sessions, risk assets finally retreated in US trade as cracks appeared in the fiscal cliff negotiations. Equities were firmer in European trade as markets continued to ride on fiscal cliff optimism and on the back of a better-than-expected German Ifo business climate reading. EUR/USD managed to print 1.33, its highest level since April this year. Unfortunately risk dipped in US trade as the Republicans failed to come up with a reasonable compromise to President Obama's proposal. Republicans may be looking to get The House to vote on its 'Plan B', while the Democrats may veto it. Some analysts blamed disappointing housing starts data for the drop in US equities, but this is unlikely considering the Fed's QE pledge. As a result, with the recent rally having been fuelled by fiscal cliff optimism, market participants decided to exercise caution despite US leaders still insisting they are hoping to have something done by Christmas. This has seen equities and risk currencies retreat from their highs with EUR/USD dropping back to around 1.324, while AUD/USD is now trading below 1.05.

Ahead of the open, we are calling the Aussie market up 0.2% at 4626. Once again this would see us trading at 15-month highs going into the end of the year. However, given the pullback we've seen in US equities it'll be interesting to see if we can hold on to these gains. On the local economic front we have the RBA bulletin due out today, but this isn't expected to have a huge bearing on trade. The Nikkei will be the index to watch after its 2.4% gain yesterday. The Nikkei is trading back above 10,000 now and it is clear there is a fresh sense of optimism in Japanese markets. Japan has been in focus all week on the back of the LDP election victory. USD/JPY printed a high of 84.62 in US trade before a minor pullback to the 50-day moving average at around 84.20. With the BoJ meeting today, we are likely to see some volatility in the yen and the Nikkei. The market seems to have been pricing in some action by the BoJ, with some calling for an additional ¥10 trillion in asset purchases, as pressure from the new government mounts. Should we see a selloff on the back of the BoJ meeting, buying the dips is likely to be the preferred strategy as the government is still likely to exercise some aggressive action going forward.

On a stock level, we expect to see a mildly softer start for BHP Billiton, with its ADR pointing to a 0.6% fall to $36.86. However, iron ore and oil both posted some gains and this might help the mining giant at the open. Iron ore jumped 2.5% to $135.50 and continues to show strong signs of a recovery. OZ Minerals had a big drop yesterday and will be one to watch after denying speculation of a production problem. Billabong shares will be in focus yet again today after a big drop yesterday on the back of a profit warning and a takeover offer. With risk sentiment cooling in US trade, we might see some of the yield plays like the banks and more defensive names like CSL Limited outperform today. Disappointing housing starts data might see the likes of James Hardie and Boral struggle.

IG Markets provides round-the-clock CFD trading on currencies, indices and commodities. The levels quoted in this email are the latest tradeable price for each market. The net change for each market is referenced from the corresponding tradeable level at yesterday's close of the ASX. These levels are specifically tailored for the Australian trader and take into account the 24hr nature of global markets.

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