Investor confidence has been dented this week by the resurfacing of the debt crisis in the eurozone, triggered by changing leadership in France and Greece.
Markets across the globe, particularly in the eurozone and Asia, are now trading below their 200 day moving averages, and their 50 day moving averages have turned down, which is a sign of prospective market weakness going forward. The US markets continue to outperform holding above their 200 day moving averages, but have shown some weakness in the last few days.
US stock markets began the week on sour note after sellers stepped in across the board, due to the disappointing Non-Farms Payroll Employment Report, and as crude-oil broke below the $US100 level. A Department of Labor report showed the US economy added fewer jobs than expected last month, as non-farm payrolls rose by 115,000 in April (well below the anticipated increase of 168,000).
In the US traders are looking for another catalyst for their markets as the earnings season comes to an end. 441 of the S&P 500 companies have reported results so far, and of those 67 percent exceeded estimates, according to Thomson Reuters data, down from over 80 percent at the beginning of earnings season. Newscorp was a standout, reporting bumper 3Q earnings with EPS growth up 58% and operating income growing 23% on the pcp. However the week has ended with some disappointing news from a number of bellwether companies, such as Cisco Systems, the networking-equipment makers, plunging -11% after giving a downbeat outlook for the next quarter and warning that big customers were exercising caution with technology spending. Priceline.com shares fell -5.3% after the online travel booker reported 1Q earnings that exceeded forecasts, but provided a cautious outlook for the second quarter. After market overnight JP Morgan shares have plunged -6.2% after announcing a $US2 billion loss tied to synthetic credit securities which were supposed to reduce risk in hedging their book.
Eurozone markets have had a terrible week, with the Spanish market leading the declines across the region, plunging to its lowest level in over eight years. Yields on Spanish government bonds again jumped above 6% as the country’s fourth-largest bank, Bankia SA, was effectively nationalised. The fallout from the weekend elections in Greece and France has cast a shadow over the eurozone markets, as traders sold-off due to concerns that the new leaders will step back from the restrictive austerity measures imposed as a result of the eurozone bailout earlier this year. France, the second-biggest EU economy, has elected Francois Hollande, who defeated Nicolas Sarkozy to become the first socialist president in 17 years. Hollande has pledged to push for less austerity and more growth in the region. Meanwhile, in Greece voters supported the anti-bailout parties, throwing doubt on whether the two main parties can put together a government strong enough to implement spending cuts to ensure the flow of bailout funds. Traders face a period of uncertainty as these new governments stamp their authority on their economies. In Germany the market is trading in a down-trending channel.
Key Asian markets have been sold-off this week, particularly in Japan and Hong Kong which are trading at three-month lows. In China the market is again backing off its six-month resistance level, as recent economic data came in-line with expectations, but confirmed the economy is slowing. The most recent Chinese trade data was disappointing. Chinese exports of goods rose less than estimated in April, lowering demand for fuel and petroleum products needed in manufacturing, with China, the second-biggest global oil consumer, reducing net crude imports as a slowing economy and refinery repairs eroded demand. The National Bureau of Statistics reported today that Chinese consumer prices (CPI) rose 3.4 percent in April from a year earlier and down from a 3.6 percent gain in March, while the producer price index (PPI) declined 0.7 percent. These figures were in-line with forecasts and the government is targeting to hold inflation within about 4 percent this year.
Last week we said “Investors Should Look To Insure Capital Gains…” stating that “…the Aussie market (ASX200) [had] reached 4440, which is the 50% retracement level from the sell-off this time last year to last year’s lows and we would expect investors to take a breather near-term…”. We were again proved right and in this week’s Analysts Eye we take a look at the bigger picture, looking to Profit with the Bears, as we give an assessment of what to expect through to the end of the financial year.
In our market the Federal Budget held few surprises, but the ABS surprised economists by reporting that unemployment has fallen to 4.9%. The defensive sectors continue to outperform, with Telstra, health-care stocks and the banks drifting higher, as investors seek out stocks that can deliver consistent yield in this low rate environment. The materials sector continues to underperform on the back of lower commodity prices, due to the ratcheting back of global growth forecasts. Commodity prices have had severe pullbacks this month, with Crude-oil down -8%, Silver down -6% and Gold and Copper down -5% since the start of May.
The Aussie market has traded weaker this week, holding below its 50 and 200 day moving averages, and is again at a key support level around 4280. On the S&P/ASX 200 the 4280 level is now the crucial support/resistance level and 4360 is the key pivot level if the market drifts higher. Stocks are looking to take a breather as we are completing the bank reporting and dividend season, and the materials and energy sectors persist in underperforming.
Investors should be looking to protect their recent profits and capital, and reduce their risk by using options and warrants strategies, and in recent Analyst’s Eye articles we have discussed using Warrants to Boost Returns and Hedge Portfolios. The D2MX Financial Advisory Services team can help with these trades. Call me on 1300 610 024 for further information. Options remain a relatively cheap form of insurance, as volatility remains low, and you can also leverage yourself for breakout trades as they occur.
Remain attuned to the news from overseas, particularly from the eurozone and China in relation to easing policies, and the US, as the US markets backs-off their multi-year highs. Monitor the performance of China and the US dollar for a guide to the future direction of commodities and equities prices.
The S&P/ASX 200 index is currently trading at 4280 and is holding below the key 50 day moving average near-term, which is a sign of weakness. Key levels for the index next week will be 4200 and 4360, with 4280 the key short term pivot level.
By Michael Hevern
D2MX Retail Trading Desk
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This report was prepared by Michael Hevern. It represents the views and opinions of the author. It is not intended for use by any third party, without the approval of Michael Hevern. While this report is based on information from sources which are considered reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect my judgment at this date and are subject to change. Contracting Hevern Pty Ltd is a Corporate Authorised Representative No. 408868 of D2MX Pty Limited ABN 98 113 959 596, AFSL No. 297950 (D2MX), and Michael Hevern has been appointed as an Authorised Representative of Contracting Hevern Pty Ltd. Opinions, conclusions and other information expressed in this report are not given or endorsed by D2MX, unless otherwise indicated. The information contained in this Report is General Advice only, as the information or advice given does not take into account your particular objectives, financial situation or needs.