Globally traders have charged into equities this week in a “risk on” move, and commodities bounced sharply off recent lows. The EU leaders clarified their “comprehensive” plans to address the eurozone debt crisis. Many markets surged through their key overhead resistance levels. Volatility eased as the week progressed, as the eurozone debt concerns abated.
Globally financial stocks have surged, after the EU leaders agreed to deliver their “comprehensive” bailout plan. The plan includes private investors taking a “voluntary” 50% write-down on sovereign Greek bonds, the size of the eurozone EFSF bailout fund will be increased to about $US1.4 trillion (an almost fivefold increase), and Greece will aim to reduce its debt to 120% of gross domestic product (GDP) by 2020. The bulls cheered an agreement reached by European leaders on a plan to resolve the eurozone’s debt crisis.
US markets have surged higher this week, past key resistance levels and are on track to produce their best October performance since 1974. The tech sector has underperformed after disappointing earnings from the likes of Amazon. The earnings reporting season saw 40% of the S&P500 companies reporting, and there were no really shocking reports, with the exception of Netflix which plunged after disappointing.
Europe investors have been anxious over the sovereign debt situation, but following the progress at the EU summit traders have jumped back into equities and commodities. EU leaders delivered the details of the EFSF and bank rescue plans, and the Chinese are reported to have said they will back the rescue plans. The eurozone summit has committed to a EUR110 billion bank rescue package and have now agreed to a $US1.4 trillion EFSF bailout package. Investors are cheering their leaders “comprehensive” plan.
Commodities rebounded sharply this week in a “risk on” play. Copper prices rebounded over 15% from last week’s lows, while Crude-oil markets broke above $US94 level for the first time in three months and almost hit $US95 per barrel. Gold prices have surged this week, up nearly 10% from last week’s lows, as the mass liquidation of funds appears to have come to an end.
Asian traders have been reacting to what is happening in Europe and the US as well, with growth sensitive stocks recovering on the back of higher commodities prices. The Chinese market has bounced off 2-year lows and has broken through a downtrend line which has been in place since early July. The Chinese annualised GDP figures came in at 9.1%, down from 9.5% in the previous quarter.
Our View For Australia
The Aussie market has traded sideways for the past few weeks, but the rampaging bulls have gained control, pushing the market past recent resistance levels, following on from the positive news out of the EU summit. The miners have recovered from their pullback last week, as commodities rebounded sharply, while the banks continue to hold on to their recent gains as we move into their reporting and dividend season. The S&P/ASX 200 is trading past the upper level of its trading range for the month and it now appears the 200 day moving average is acting as resistance.
Another positive for our markets could be an interest rate cut next week. 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. According Credit Suisse, there is now a 100 percent market expectation of a 25 basis-point cut, with a 6 percent chance of a 50 basis-point rate cut. This news help the market to hold on to earlier gains.
CPI came in line with expectations at +0.6% q/q and +3.5% y/y. However both the weighted median and trimmed mean measures were significantly below at +0.3% versus +0.6% expected. These underlyings’ are the numbers the RBA watch closely, so speculation of rate cuts has increased, with short-end AUD swaps around 10bp lower.
Last week we suggested that the bulls and the bears would again be wrestling for control of the markets, well the Bulls now rule. The Aussie market is trading above its 50 day moving average, which sits around 4150, and is now testing resistance around its 200 day moving average, which sits around 4,410.
Investors should be looking to utilise options strategies to protect their profits in this type of market. Investors have given their vote of approval on the eurozone bank rescue package and the proposals for the extension of the EFSF bailout package.
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 4410 having surged past the 4280 resistance level this week. Key levels for the index next week will be 4250 and 4450, with 4300 the key pivot level. Be prepared to use options to protect your profits and reduce your risk. Expect to see volatility ease going forward as the market participants look for some confirmation of the near-term market breakout.
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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