Investor confidence has been shattered this week, by resurfacing eurozone debt crisis contagion fears, triggered by geopolitics in Greece, fears of a disorderly default and the possible removal of Greece from the 17-nation EU, as well as by problems in the Spanish banking system.
Markets sold-off heavily across the globe this week. Traders continued to sell on concerns over Greece and the potential contagion, with fears that the eurozone financial system is on the verge of collapse. Global markets have erased over $US3 trillion from the value of equities worldwide this month, as traders fret over this eurozone financial system destabilisation.
Markets, particularly in the eurozone and Asia, have continued selling down, now that they are firmly trading below their 50 and 200 day moving averages, which is a sign of continued market weakness going forward.
The Australian market has also sold-off severely this week, and is down over 300 points as local investors joined in on the selling spree. The selling has been across the board, and the materials sector continues to lag the overall market.
US stock markets are ending the week lower and are testing 4-month lows, on concerns over global financial stability. The Dow Jones index finished below the 200 day moving average for the first time since last November. In the broader market the S&P500 and the tech-heavy Nasdaq fell to 4-month lows, with all ten S&P500 sectors finishing in the red. In corporate news Jamie Dimon, JP Morgan’s CEO, will face regulators over the $US2 billion trading loss announced in the past week, while there is excitement over Facebook’s IPO which is due to list tonight, at $38/share raising $US16 billion in the biggest IPO ever and valuing the company at over $US100 billion (at a PE of 100).
Commodity prices are looking for support. Crude-oil has fallen to a 6-month low, while gold surged overnight, the most since October as the gold price rebounded from its lowest level of the year. The US Dollar Index is driving commodity prices and has climbed for a record 14th straight day, which is putting selling on commodity prices.
European share markets continued their rout this week. The Stoxx Europe 600 Index lost another -1.1% overnight, as five shares dropped for every one that gained and it is extending its declines to the lowest level this year. Selling has continued as concerns about the European debt crisis deepen. Moody’s Investors Service has downgrade the credit ratings of 16 Spanish banks, confirming the cuts after U.S. markets closed.
Across the region eurozone banks have slumped to their lowest levels since November, and are the biggest drag the eurozone markets. The Spanish market is at 9-year lows, while the Italian market fell to its lowest level since March 2009. In a flight to safety the German bunds rose, pushing yields on two, five and 10-year debt to record lows. Spanish cost of debt funding has doubled since April. Greece has scheduled new elections for June 17, and this is seen as a vote for a referendum on Greece staying in the 17-nation currency bloc, so the market uncertainty is likely to continue through to mid-June.
Asian stock markets plunged this week, due to concerns over Greece moving closer to an exit from the eurozone after coalition talks failed to form a new government. Across the region the financials and materials sectors led the falls, as traders hit the sell button on concern over eurozone financial stability and slowing growth in the Chinese economy. The Hong Kong market has plunged to a 4-month low, as sellers stepped in on ongoing concerns over faltering eurozone growth. The Chinese market has fallen below its 50 day moving average and has had 7 successive sessions of selling. In Japan the Nikkei index fell below 8800 for the first time since the start of February, as eurozone-focused exporters were hit heavily.
In our market the defensive sectors continue to outperform, with Telstra, gambling and health-care stocks holding ground, 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, and the banks are being sold down in sympathy with their global counterparts. Commodity prices have had severe pullbacks this month, with Crude-oil down -15%, Silver down -15%, Gold down -13% and Copper down -11% since the their 2012 highs.
The Aussie market has been trashed this week, breaking below its 50 and 200 day moving averages, and plummeting below the key 4280 level. On the S&P/ASX 200 the 4280 level will now be a crucial resistance level and the 4080 level is now a pivotal level for the week. Stocks have seen sustained selling, including the banks, 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. We have successfully hedged our banking positions using MINI warrants and can help you with this type of strategy, as discussed in my article on Hedging/Shorting With Limited Risk Using MINIs. The D2MX Financial Advisory Services team can help with these trades. Call me on 1300 610 024 for further information. Options remain an excellent form of insurance, but volatility has risen.
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 test their 200 day moving averages. Monitor the performances of Greece, Spain, 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 4075 and is testing breakeven levels for the year. Key levels for the index next week will be 3980 and 4200, with 4120 the key short term pivot level.
By Michael Hevern
DMX Trading Desk
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