Month-End Rally Market Setup Is In Play
Investors are tentatively breathing a sigh of relief with markets now set up for a month-end rally following a month of sustained selling. Many markets have been testing key levels this week with investors beginning the week with further selling. We could see some consolidation with an upward bias in the next week, but there are plenty of headwinds for investors to mull over as the month of June unfolds.
Globally, markets have been plagued with concerns over the sovereign debt issues in Europe. Asian markets have been hindered by reports showing Japan is in a recession, and Chinese growth is slowing near-term.
The week started with further selling as investors were again cautious over the results of the key IMF and EU finance minister meetings which deliberated over the plight of the PIIGS economies, in particular Portugal, Greece and Spain. The spectre of a debt restructure is still hanging over Greece, but Portugal received a bailout package.
The US markets have seen some respite after a number of positives including the very successful LinkedIn IPO and a bullish note from Goldman Sachs on the prospect of commodities in the near-to-medium term.
In Australia the market has benefited from the recovery in resource prices but has been weighed down by the banks being downgraded by Moody’s. Commodities prices have recovered this week due to the US dollar running into key resistance, however the jury is still out on the sustainability of the global economic recovery.
The ASX All Ordinaries and the S&P/ASX 200 experienced sustained selling early this week. The Aussie markets are again testing key support levels where a potential month-end rally can be launched. Banks have been the worst hit in our ASX top 20 stocks this week because of a delayed reaction to the Moody’s downgrade of last week, and Goldman Sachs’ downgrading of ANZ and CBA coming to a hold. However, the banks are now starting to look attractive on a dividend yield basis.
Miners have benefited from the recovery in commodities prices this week, but they still have a number of unresolved issues on the taxation front with the mining tax in focus after the WA government sharply increased the state iron ore royalties to be charged to the miners by $2 billion, and the spectre of the carbon tax is also in the background.
The strong Aussie dollar is still weighing on company profits and forecasts and we had a number of companies foreshadowing profits downgrades this week.
US stock markets are setting up for a month-end rally. The leaders this week have been the mining and energy sectors which have outperformed, after Goldman Sachs and Morgan Stanley reported a boost to their commodities forecasts for 2011 and 2012. The focus was on crude oil price forecasts for the rest of the year. Manufacturing data continues to point to a softening recovery in the US, which is particularly worrying given the FED turns off the QE2 tap shortly.
The US dollar is at key resistance levels currently and this could be a leading indicator for the equities/commodities markets near-term.
European stock markets have been under pressure this week with continued concerns over debt issues in Greece and the other PIIGS economies weighing on sentiment. Investor sentiment was buoyed mid-week with Greece announcing it had accepted an international bailout, and that it had reached a preliminary agreement with the International Monetary Fund (IMF) and European Union (EU) for a new economic adjustment plan. There is still uncertainty over the proposed bailout package and a restructure of Greek debt is looking more and more likely to be the eventual outcome.
Late in the week the sentiment for banks improved as the Fitch Ratings agency said it does not foresee any rating action on German banks as a direct result of exposure to Greek sovereign debt. Rising commodities prices prompted traders to seek stocks aligned to global growth, however the IPO of Glencore International (the commodities trader) was subdued.
Sovereign debt is of great concern since interest payments can often place great demands on governments and individuals. Using a debt-to-GDP ratio is one of the most accepted measures of assessing a nation’s debt. In theory, one of the criteria for admission to the European Union’s Euro currency is that a country’s debt should not exceed 60% of that country’s GDP.
Here is some food for thought. Standard and Poor’s has released its estimates of debt-to-GDP ratios for the European majors and they are as follows:
Greece 143%, Ireland 96.2%, Portugal 93.0%, Germany 83.2%, and Spain 60%.
This is why the IMF and the EU finance ministers have serious difficulties in trying to reduce the sovereign debt of these nations without collapsing the global economy, and why the sovereign debt issues will be with us for some time to come.
Overnight in London the FTSE 100 index closed up 0.2% at 5,880, the German DAX was down -0.8% at 7,114, while in France the CAC was down -0.3% at 3,917.
Asian markets have rebounded as the week progressed, with investors going “bargain hunting” for stocks that had been beaten down in the recent sustained sell-off. The Japanese market has been under pressure after GDP data confirmed that it is in a “technical” recession after the problems resulting from the March earthquake.
Chinese markets have also been soft with data continuing to point to slow growth and showing that a preliminary HSBC Purchasing Managers Index had slipped to a 10-month low, pointing to a slow-down in manufacturing. Resource stocks are starting to see a recovery across the region on the back of the recent rising commodities prices with gold above $US1,500 and crude oil holding above $US100 after Goldman Sachs and Morgan Stanley raised their 2011 and 2012 forecasts earlier in the week.
Overnight in China the SSE Composite was down -0.2% at 2,736, while in Hong Kong the Hang Seng Index closed up 0.7% at 232,900 and in Japan the Nikkei 225 Index was up 1.5% at 9,562. The South Korean KOSPI was up 2.7%, while the Indian market was up 1.1%.
The Australian share market has again had a strong rebound this week after early weakness. As the week progressed investors added risk to their portfolio positions and took advantage of the sustained sell-off in equities prices in the past few weeks.
The S&P/ASX 200 index is again testing resistance at its 200-day moving average and the recent recovery in commodities prices has added to support. The Aussie markets have set up for a potential month-end rally, but need to close above this month’s high before a sustained rally can be contemplated. Banks are now starting to look attractive on a dividend yield basis and the miners will have benefited from the recovery in commodities prices this week. The headwinds remain with a strong Aussie dollar and the proposed carbon and mining resource taxes simmering in the background.
The S&P/ASX 200 is currently trading at 4655 having found support around the 4,580 level this week. Key levels for the index next week will be 4750 to 4580.
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By Michael Hevern
Head of Research