Markets Back Off Key Resistance Levels
Investor nerves were shaken again this week due to a number of large aftershocks in Japan, and several global markets sold-off from key levels. The drivers this week have been inflation, global growth rates, interest rates, geopolitical unrest in the Middle East and North Africa and continued European sovereign debt concerns. In addition, Asian investors are wary of China taking further monetary tightening action in the near term in order to address their domestic inflation issues.
Commodities prices were again in focus this week, selling off from their record levels. Copper backed off 2-year highs, while the price of crude oil retreated sharply after hitting $US113 a barrel in New York for the first time in two and a half years, as investors start factoring in the detrimental impact of elevated energy prices on global growth. Silver sold off from its 31-year peak, but gold remains around its all-time high. The US dollar continues its decline, falling further from its 14-month low against the euro.
Investors need to exercise caution near-term and at the very least take out protection through options, otherwise lighten positions until markets trade above their key resistance levels.
The Australian Market
The ASX All Ordinaries and the S&P/ASX 200 have backed off 12-month highs and are still searching for some catalyst to push through these levels.
M&A activity continues to be in focus. Woodside was rumored to be in talks with BHP regarding a potential takeover, which BHP later denied. Copper miner Equinox Minerals received an “opportunistic” unsolicited $6.3 billion all-cash takeover offer from Minmetals Resources Ltd, and Rio Tinto’s takeover bid for Riversdale has gone unconditional as their stake is now over 50%.
Goldman Sachs called for a pull-back in commodity prices at the start of this week, and these prices will again be a focus next week, regrouping after backing off record levels. The Aussie dollar remains at record levels.
US Markets
U.S. stock markets have drifted modestly lower this week, with the primary focus being on the start of the corporate earnings season and government budgets. Markets have been weighed down by the banks and energy stocks.
Corporate earnings have been mixed but the news from President Obama that the government plans to slash the U.S. budget deficit by $4 trillion over the next 12 years through a combination of spending cuts and tax increases was well received.
The U.S. House of Representatives voted to approve a budget bill that will fund the government through the remaining months of fiscal year 2011. Financial stocks weighed on markets again after news that U.S. investigators are examining whether some of the world’s biggest banks colluded to manipulate a key interest rate before and during the financial crisis. In economic news an index of U.S. producer prices rose a seasonally adjusted 0.7% in March due to rising energy costs, and inline with expectations.
Crude oil remains around $US108 per barrel in New York, and if energy prices remain at these elevated levels the global economic recovery will be in jeopardy. The reporting season continues next week and will give a further insight to the impact of higher input costs due to higher commodities prices. Gold prices are back at record levels above $US1,470 as the US dollar remains weak.
Overnight the Dow closed up 0.1% at 12,285, the S&P 500 index was flat at 1,314 and the tech-heavy Nasdaq ended down -0.1% at 2,760.
European Markets
European markets have traded lower this week. The European banks have again been in focus, with investors reacting nervously to German comments on Greece’s debt, stoking fresh fears in the eurozone. The German economy is now expected to grow 2.6% this year and 1.8% in 2012, while inflation is set to remain low at 2.4% and fall to 1.9% in 2012, according to government forecasts. Greek money market rates jumped sharply after the German Finance Minister suggested that Athens might have to restructure its debt, meaning investors would lose out. In London the market fell, with mining and energy stocks ranking as the biggest decliners as commodities prices pulled back from their record levels.
Overnight the FTSE 100 index closed down -0.8% at 5,964, the German DAX was down -0.4% at 7,146, and the French CAC was down -0.9% at 3,989.
Asian Markets
Asian markets generally ended lower this week. Nerves have been tested again by a number of large aftershocks in Japan, and fortunately the damage has been limited.
China has also been the major driver of sentiment in the region, posting its first quarterly trade deficit in seven years ($US1.02 billion) as rising commodity prices pushed manufacturing costs higher. However analysts expect a large trade surplus for the full year as its exports tend to grow later in the year. Elsewhere the Chinese State Council declared it will take all required measures to maintain price stability and relax controls on the property sector. China will release March inflation data today, expected to rise to 5.3% (up from 4.9%) and there are concerns that the government may need to tighten its monetary policy further, which could weigh on global demand for commodities in particular.
Yesterday the SSE Composite was down -0.3% at 3,043, while in Hong Kong the Hang Seng Index was down -0.5% at 24,014 and in Japan the Nikkei 225 Index was up 0.1% at 9,653. The South Korean Kospi Composite gained 0.9%, while markets in India and Thailand were closed for a public holiday.
Our View
The S&P/ASX 200 index looks set to continue its retreat from key resistance levels next week, currently trading at 4884, having backed off the 5,000 level. The key levels for next week will be 4750 and 5000.
The focus near-term will continue to be on the Chinese measures to address inflation, U.S. earnings reports, the Aussie dollar and commodities prices, particularly crude oil.
Investors should use protection through options to hedge their long positions near-term.
By Michael Hevern
Head of Research
