Globally traders were cautious this week, as sentiment was driven out of Europe, as they move to clarify their “comprehensive” plans to address the eurozone debt crisis. Many markets are still testing key overhead resistance levels from their recent trading ranges. Volatility remained high over the past week as the eurozone debt concerns continue to be in focus and the US earnings season rolled on.
Globally financial stocks continue to be volatile, with further downgrades this week, due to concerns over capital adequacy, but the news that the European Commission are meeting this weekend to develop a bank rescue package should help with the financial system crisis in the eurozone. There are still short selling bans in a number of European countries. There were also rumours during the week that Germany and France has agreed to an extension of the EFSF to EUR2 trillion, but this has since been dismissed.
US markets have eased back from key resistance levels at the top of their recent trading ranges, as the earnings reporting season rolled on. The tech sector has been sold down after disappointing earnings from the likes of IBM and Apple, and the financials were hurt by Goldman’s disappointing report. The earnings reporting season heats up next week with 40% of the S&P500 companies reporting. The Fed’s beige book troubled traders as the Fed presented gloomy forecasts, citing “uncertain” times for the market ahead.
Europe investors have been anxious over the sovereign debt situation and have been jumping at shadows, as rumours abound regarding the prospects of the EFSF and bank rescue plans. The eurozone summit to be held on the weekend will be the focus for the next few trading sessions, but from all reports traders may be disappointed with the clarity of the outcome of the “comprehensive measures” to resolve the crisis. Investors are continuing to show some caution, as they take profits off the table from recent gains.
Commodities remain a key focus and have been sold-down heavily again this week, after China after reported its annual GDP reading came in at 9.1% (down from 9.5% in the previous quarter). The GDP reading was seen as a negative near-term, but in the medium term it could point to some easing by the Chinese government going forward, and this will help commodities prices.
Copper prices have plunged -12 percent this week and were down -6 percent overnight, for their biggest single day collapse in a month, on fears of a double-dip recession and growing doubts that Europe will resolve its debt crisis any time soon. Crude-oil markets barely moved, after news of the death of Libyan strongman Muammar Gaddafi, though it could lead to an earlier-than-expected full restoration of Libya’s oil exports. Libya produced about 1.4 million barrels per day of mostly high value light sweet crude before the rebellion against Gaddafi broke out at the start of 2011. Gold prices have retraced this week, and fell -2 percent overnight for its biggest single day drop in a couple of weeks, hurt by technical selling and concern over whether European leaders can reach a deal to boost the region’s bailout fund.
Asian traders have been reacting to what is happening in Europe and the US as well, with growth sensitive stocks being hurt by the ratcheting down of the economic growth forecasts and the subsequent sell-off in commodities prices. The Chinese annualised GDP figures came in at 9.1%, down from 9.5% in the previous quarter and the Chinese market is now trading down at levels not seen since early 2009.
Our View For Australia
The Aussie market has backed off the top of its trading range this week, following on from the lead from the overseas investors. The recovery in the miners came to an abrupt halt this week, as commodities were sold-off sharply again, while the banks continue to hold on to their recent gains as we approach the dividend season. The S&P/ASX 200 hit the upper level of its trading range this week as we predicted last week, but has now retreated and the index is trading below its 50 day moving average.
We had a milestone anniversary this week, as it has been almost a quarter of century (24 years) since the 1987 October crash. The US market collapsed -23%, while the ASX fell -25% on “Black” Monday in 1987, and by the end of October the US market had retracted -23%, while the ASX plunged -42% and the equities markets traded sideways for the next three years.
The RBA has set the stage for an interest rate cut before the end of the year. Analysts expect a cut of 25 basis points at the next meeting on Melbourne Cup day in November. An interest rate cut would be good for the Christmas trading period.
Last week we suggested that the bulls and the bears would be wrestling for control of the markets this week, and this has proven to be the case. Going forward the struggle is set to continue into next week. The Aussie market is trading at its 50 day moving average, around 4150 this week, and the this level looks to be a key pivot level as the market has found resistance around 4300.
Investors should be looking to utilise options strategies to protect themselves in this type of market. There continues to be issues over eurozone bank solvency and as traders await some detail on the “comprehensive measures” to address the eurozone banking and sovereign debt crisis, which could be forthcoming at the EC summit this weekend.
Remain attuned to the news from overseas particularly from China, Germany and the US regarding their economic growth and debt issues. Monitor the performance of the US dollar for a guide to the future direction of commodities and equities prices.
The S&P/ASX 200 is currently trading at 4155 having backed off the 4300 level this week. Key levels for the index next week will be 4300 and 4080, with 4150 the key pivot level. Be prepared to use options to protect your capital and reduce your risk. Expect to see further volatility going forward as the market participants look for some confirmation on the near-term 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.
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MDS Financial Advisory Services offers general advice on trading options to generate consistent steady income on your investment portfolio. Call me on 1300 610 024 for further information.
By Michael Hevern begin_of_the_skype_highlighting end_of_the_skype_highlighting
Head of Research
