Global shares prices have been under pressure in the later part of this week, as investors have shifted away from riskier assets on speculation that monetary easing in the United States will not be as substantial as originally thought. The Wall Street Journal reported that QE2 may be spread over several quarters at anywhere from $US250 billion per quarter.
Earlier in the week the G-20 meeting “resolved” a “non-binding” G-20 agreement where countries agreed not to engage in “competitive devaluation” of their domestic currencies. This initially resulted in a sell-off the US dollar, however currency traders then turned their attention to QE2, providing support for the US dollar. Commodities have backed off record levels, as the US dollar attempts to find support.
European and Asian markets have been consolidating, with the Chinese market continuing to test key overhead resistance of a down-trend line that has been in place since mid-2009.
The Aussie market has again been treading water this week, and we are still constrained within the trading range between 4550 and 4720. The key news this week has been inflation, corporate reporting and the ASX bid.
US Markets
US markets continued to drift higher this week and remain near 2-year highs. The US dollar is looking to find support around current levels. Investors are exercising caution ahead of the Federal Reserve’s crucial FOMC meeting next week, and have had to digest plenty of earnings reports this week that have painted a mixed picture about the ongoing strength and prospects of the US economy. Overnight the Dow closed down marginally -0.1% at 11,114, while in the broader market the S&P 500 index was up 0.1% at 1,184 and the tech-heavy Nasdaq ended up 0.2% at 2,507.
European Markets
European stocks have been consolidating this week. Trading sentiment in Europe has been driven by news from the US, with investors hanging out for a decision on the scope of the second round of stimulus for the US recovery (QE2), expected to be resolved by the Fed Reserve at next week’s meeting (3rd November).
The German market has been hovering around 52-week highs and the euro is still hovering around 8-month highs at $US1.40 as the US dollar is looking to find support. Overnight the FTSE 100 index closed up 0.6% at 5,678, the German DAX was up 0.4% at 6,595, and in France the CAC was up 0.5% at 3,834.
Asian Markets
Asian markets have been mixed this week. Overnight the Japanese Nikkei average drifted lower to its lowest close in 6 weeks as short-covering that emerged after the Bank of Japan’s announcement of details of its asset buying scheme failed to support stock prices. The Chinese market remains at 6-month highs but is still testing key overhead resistance of a down-trend line that has been in place since mid-2009. Mining and energy stocks have been trading lower, due to lower commodity prices, but falls in the Chinese market have been limited by gains in banks, after several lenders reported better-than-expected results. Yesterday in China the SSE Composite closed down -0.2% at 2,993, while in Hong Kong the Hang Seng Index was up 0.2% at 23,211 and in Japan the Nikkei 225 Index was down -0.2% at 9,366.
Commodities
The US dollar is attempting to find support at current levels and this is threatening to put pressure on base metals prices near term. The Fed’s QE2 is yet to be implemented, but is expected to be resolved at the next FOMC meeting on 3rd November.
Copper has been in focus this week and closed up overnight, buoyed by renewed dollar weakness, supply threats and better-than-expected US employment data. However gains were constrained by uncertainty over the scope of monetary easing by the US Federal Reserve. Mid-week copper prices touched $3.90 per lb, which marked the highest level since July 2008.
Overnight commodities were higher, and the benchmark crude NYMEX for December delivery was up 0.1% to settle at $US81.99. Copper prices were down, with Copper for December delivery up 0.3% at $US3.7845. Gold prices were lower, with December gold up 1.6% at $US1,343.60.
ASX News
The Aussie market has been trading sideways this week and is still constrained within the trading range between 4550 and 4720. The big stories for the week include inflation, corporate earnings and the bid for the ASX.
The ABS reported subdued inflation figures that place inflation at the mid-point of the RBA’s target range, and relieve the pressure on the RBA for another interest rate hike, (refer to our blog for more details). Corporate reporting has been active, particularly with the banks reporting record profits. This has prompted the government to suggest a review of banking, no doubt to find ways to take a bigger slice of the pie. In M&A the $8.3 billion takeover bid for ASX Limited by the Singapore Exchange has met some stiff opposition from the regulatory and political ranks. Investors and banking executives are eagerly awaiting the RBA interest rate decision on the November 2nd meeting (Melbourne Cup Day).
Our View
The melt-up continues, however investors are hanging out for a decision on the scope of the second round of stimulus for the US recovery (QE2), expected to be resolved by the Fed Reserve at next week’s meeting (3rd November). Mixed corporate earnings over the past few days have dampened investor sentiment in the stock market, which has undergone a relentless rise since early September. Investors should continue to monitor the US dollar’s performance, as a leading indicator for any change in sentiment near term.
The S&P ASX200 is currently trading around 4675 and is near the upper band of its current trading range. The key levels on the ASX are still around 4720 and 4,550. Investors need to be nimble next week, as we have some crucial economic news which could set the tone for markets trading into Christmas, including the RBA’s rate decision, the FOMC meeting (QE2) and the US dollar support.
