The Ace In The Hole
We have experienced another volatile week, but investors have remained positive ahead of the Jackson Hole summit.
Data out of the US continues to point to a slowing economy, but the primary focus this week has been on the economic summit which will be held in Jackson Hole, Wyoming. US investors have been pushing stocks prices higher in anticipation of some news on further quantitative easing.
In Europe investor sentiment has been on the edge, with continuing worries about the debt crisis and the fact that the short-selling ban has had to be extended. There was some good news as Barclays Capital released a bullish note, reiterating their positive stance on European equities and upgrading the European telecommunications sector to “overweight”. Also the euro zone composite PMI for August held steady at 51.1 in August, but above expectations of 50, and in Germany the manufacturing PMI was 52 for August, above forecasts of 50.8. The rumours about Germany overnight tested investors’ nerves, however European markets are finishing higher having held last week’s support levels.
In Asia this week investors were buoyed by data which showed an improvement in Chinese manufacturing activity. Preliminary data released by HSBC showed the Chinese Manufacturing Purchasing Managers Index (PMI) for August came in at 49.8 from a final reading of 49.3 in July. This report suggests implied factory activity in China contracted, but turned out to be much better than expected. The Chinese market is finishing higher for the week. However investor sentiment has been tested by a downgrade of Japan’s credit rating to AA3 from AA2 by Moody’s Investors Service, which cited sovereign debt issues and the global economic outlook. The Japanese Nikkei Stock Index is testing lows not seen since April 2009, as the exporters continue to be battered by the strong yen. The selling was broad-based due to the weak economic outlook.
The Aussie market has had a positive week, having held last week’s support levels. There have not been too many disappointments in the reporting season and commodities prices have generally traded higher for the week.
Our View For Australia
The Australian share market continues to be driven by overseas sentiment, particularly in Europe and the US, so expect the volatility to continue near-term. The S&P/ASX 200 index has managed to swing higher with the key support level around 4070 near term and if that fails the next support level would be 3750, which was a pivotal level back in the 2008 GFC recovery phase and held last week.
Expect stock prices to continue experiencing volatility near term. In commodities the standout performer has been gold, but even it saw heavy selling when it reached $US1,900 this week, and traded as low as $US1,700 overnight as the bullish trade became overcrowded.
There are still concerns that the sovereign debt situation in Europe is out of control. The rumours overnight that Germany could be the next to face a credit rating downgrade and that they were going to introduce a short-selling ban sent that market down over 4% at one point. The rumours came after France, Italy and Spain all extended their short-selling bans. Note that the rumours about Germany proved to be unsubstantiated, but when faced with uncertainty investors will sell first and ask questions later.
The S&P ASX 200 has held above the 4000 level this week, which is positive. The line in the sand was drawn recently around 3750 and the 4050 level remains a pivot key in the short term.
Investors need to remain attuned to the news that will come out tonight from the US Federal Reserve Chairman at the economic summit at Jackson Hole Wyoming. Analysts generally agree that there will not be any substantial monetary easing initiatives announced tonight and the Fed will be commenting on the weakening state of the US economy. The market reaction to this news will set the tone for the markets next week, in an environment where there are concerns over faltering global growth and European debt contagion fears, which is sparking the spectre of a double-dip recession.
Our reporting season is coming to an end, and there have been mixed results (as reported in our daily morning report). The RBA still looks set to leave rates on hold near-term, the dividend season is well underway, and the Aussie dollar has strengthened this week which is providing additional headwinds for corporations with US earnings.
Banks are attractive on a yield basis, but are still trading below their 50-day moving averages, and recent key support levels need to hold. Many blue chip stocks look even cheaper on a valuation basis but investors are still fearful. Fund managers and investors alike are still underweight equities.
The markets need to stabilise near-term and sentiment from overseas needs to improve before investors can feel comfortable with jumping back into stocks, but there continue to be trading opportunities. On an earnings basis there is reason to start accumulating when all others are most fearful, and the recent reporting season has given investors a clearer insight into specific companies. The S&P/ASX 200 is currently trading at 4200 having found support around key support at 4070. Key levels for the index next week will be 4300 and 4000.
Keep that shopping list close at hand and be prepared to start accumulating when others are most fearful, you can use options to limit you risks. Expect to see further volatility going forward as the market participants look for some guidance for the direction of the market.
Use options strategies to reduce your risk in these volatile times. The MDS Financial Advisory Services team can help with this and we have also discussed some of the strategies in our Analyst’s Eye Articles recently.
For Buy and Sell recommendations on ASX listed companies register for a free trial of MDS Financial Research.
MDS Financial Advisory Services offers general advice on trading options to generate consistent steady income on your investment portfolio. Call 1300 610 024 for further information.
By Michael Hevern
Head of Research