Markets Drift Higher as Inflation Reemerges
The Australian market has traded sideways this week following subdued leads from overseas, and the shortened trading week has meant that trading volumes were again below average. The market is still digesting the impact of the devastating floods and the proposed flood levy, with retail stocks coming under pressure again. Downer EDI disappointed again, and we had some unsurprising production data from our miners, showing production fell due to the floods. However earnings have been supported by the elevated commodities prices.
The US markets have been drifting higher this week, with the S&P500 index rising to the 1300 level for the first time since June 2008. Corporate earnings reporting continues to support the view that the recovery remains intact. The Federal Reserve left rates on hold but said that the jobless recovery still needs the QE2 support. It also reaffirmed its commitment to the $US600 billion treasury buying program.
Also giving investors something to think about were comments from President Obama in his State of the Union address in which he confirmed that the US’s ballooning government deficit and public spending are unsustainable. President Obama called for Congress to lower the corporate tax rate by closing industry-specific loopholes and find spending cuts across the government, suggesting a 5-year freeze on non-defense discretionary spending. The corporate reporting season continues into next week and fourth quarter GDP figures are due for release tonight.
Overnight the Dow closed flat at 11,990, while in the broader market the S&P 500 index was up 0.2% at 1,300 and the tech-heavy Nasdaq ended up 0.6% at 2,755.
European markets began the week under pressure over sovereign debt concerns, but as the week progressed they joined the US in drifting higher with investors choosing to focus on good news out Germany and the United States.
In economic news the European Commission’s measure of confidence among manufacturers rose to 6.0 (up from 4.9), driven by rising orders, particularly for exports. In Germany, import prices rose 12 percent in December, the fastest annual pace since 1981, driven by soaring costs for commodities including energy and metals. For the year, energy prices rose 34 percent and iron ore prices jumped 98 percent, while non-iron ore metals rose 38 percent. This news is proving to be a dilemma for the ECB as Germany’s booming economy and rising commodities prices are fueling euro-zone inflation, just as the ECB is battling to combat the debt crisis in the PIIGS economies which is dampening growth.
Overnight in London the FTSE 100 index closed slightly down, -0.1% at 5,965, while the German DAX was up 0.4% at 7,156, and in France the CAC was also up, 0.3% at 4,079.
Asian markets continue to be driven by apprehension that China will be required to further tighten its monetary policy in order to reign in its inflation and caution ahead of the Chinese Lunar New Year. The Chinese government has in fact introduced further measures to cool the sector, raising the minimum down payment on second-home purchases to 60% from 50% on Wednesday. Bargain hunters have stepped into the Chinese market in the last couple of sessions pushing materials and financial stocks higher, but property stocks have sold down. The Japanese markets are likely to be weighed down today, after the Standard & Poors rating agency cut Japan’s long-term sovereign-debt rating by one notch to AA- from AA overnight (its first downgrade in nine years).
Yesterday in China the SSE Composite closed up 1.5% at 2,749, while in Hong Kong the Hang Seng Index was down -0.3% at 23,780 and in Japan the Nikkei 225 Index was up 0.7% at 10,479.
Next week we should start to see trading volumes pick up as we focus again on US corporate earnings and local corporate reporting. China will celebrate Lunar New Year, but investors need to continue to monitor China’s response to their recent strong economic data.
The S&P ASX200 is trading at 4790, below its key weekly resistance level (4840) which has been in place since November. Use the Aussie dollar as a leading indicator for our market and be wary of the Chinese government’s position on interest rates near-term. Key levels for next week will be 4840 to 4740. Be prepared to hedge your positions, because due to the current low options volatility investors with long term portfolios can hedge their positions cheaply.
By Michael Hevern
Head of Research