Investors have been kept on edge this week ahead of the European Union summit, which is currently underway. Traders appear to have had limited expectations over the outcome of this summit, but the EU leaders have today announced that they will make EUR120 billion available for a eurozone growth plan.
US markets are bouncing between the 50- and 200-day moving averages, and as long the indexes hold below the 50-day moving average the bears remain in control. US stocks have been under selling pressure this week, as traders have been unwilling to commit ahead of the EU leaders’ summit. Mining stocks continue to experience sustained selling pressure as commodity prices remain at multi-month lows.
Overnight stocks broadly sold off after the US Supreme Court surprised by saying Congress was acting within its powers under the Constitution when it required most Americans to carry health insurance or pay a penalty. This was a bonus for hospital providers, but managed-care providers slumped as the law keeps in place requirements for insurers to cover people regardless of health history. Retail stocks are likely to sell off tonight, in the wake of Nike dropping heavily after disappointing earnings, citing slowing Chinese demand.
Crude-oil prices are still below $US80 with inventories around 22-year highs, and gold prices are down at $US1,555, after disappointment over no QE3 being announced.
European stock markets continued to retreat this week, with the three major indexes from Germany, France and the UK all in multi-week falling channel formations. The bears remain firmly in control and a lot is riding on the outcome of the EU summit, where the leaders are attempting to formulate a 10-year road map for the eurozone. Some of the issues include common banking supervision, deposit insurance and a “criteria-based and phased” move toward joint debt issuance, and also the EU imposition of upper limits on annual budgets and debt levels for the 17 eurozone nations. The German Chancellor Angela Merkel has stated Germany’s opposition to the issuance of joint euro-area bonds as a way of lowering Spanish borrowing costs, saying sovereign governments must be held accountable.
Across the eurozone the financials have led the declines, as Spanish bond yields surged above 7% again and the German unemployment rate rose more than forecast, climbing in June for the fourth month this year. As the EU summit in Brussels progresses there has been some optimism though, that the leaders were making progress in their discussions over the possibility of integrating budgets and banking systems. Expectations for the EU summit have been low, as previous gatherings have failed to produce any significant breakthroughs, however the German Finance Minister Wolfgang Schaeuble has reportedly said that Germany could agree to shared liability on debt if eurozone countries agree to give up sovereignty over their budgets, marking a softening in Germany’s stance on the issue. And just hours ago the EU leaders reported that they will make EUR120 billion available for a eurozone growth plan.
Asian stocks markets remained under selling pressure this week, as any gains quickly eroded as traders awaited the outcome of the EU summit meeting. The Chinese market has given back all its gains for the year, due to concerns over a slowing economy. The Chinese market has plunged -7.4% in June, the second-worst performance for the Asian region, as lower-than-estimated industrial output and retail sales data has outweighed the Chinese central bank’s first interest-rate cut since 2008. The Chinese economy has grown at its slowest pace in almost three years in the first quarter. This poor performance of the Chinese market is weighing on the ASX, particularly the mining stocks.
The Australian market has traded sideways again this week, and is tentatively holding around the key 4000 level. Sentiment has been mixed, driven by news from the eurozone and hopes of central bank easing. Major market sectors have been tentatively holding on to the support levels of last week.
In our market the defensive sectors continue to outperform, with Telstra, Real Estate REITs and health-care stocks holding ground, as investors seek out stocks that can deliver consistent yield in this low rate environment. The materials and energy sectors continue to underperform and have broken another key support level on the back of lower commodity prices. The industrials sector has broken down, but banks are tentatively looking to find some support as investors turn to dividend yield. Providing some support this week have been News Corp, which has confirmed it will split its core businesses in a move to unlock value, and the retail sector which received a boost when David Jones announced it has received an unsolicited bid.
On the S&P/ASX 200 the 4120 level will now be a crucial resistance level and the 4080 level is again a pivotal level for next week. We have not seen capitulation by the bulls as yet, which could come about if the current weekly support levels are breached at 3985, in which case we could see the 3950 and then the 3850 levels tested.
Investors should have protection in place for their capital, and could look to reduce their risk by using options and warrants strategies. With the sustained selling we have endured over the past few weeks we remained cautious, but we are also looking to pick up value stocks that pay consistently high dividend yields, when they reach our buy levels and will turn to growth stocks if we see a change to “Risk-On” sentiment with some action from the EU Leaders summit.
Remain attuned to the news from overseas, particularly from the EU leaders’ summit, China and the US, as the US markets test their 50-day moving average resistance levels. Monitor the performance of Italy, Spain, China and the US dollar for a guide to the future direction of commodities and equities prices. It is a busy week for the US next week with the July 4th holiday and the latest non-farms employment report due out Friday, and then there will be a reaction to the outcome(s) of the EU summit.
The S&P/ASX 200 index is currently trading at 4034 and is testing breakeven levels for the year. Key levels for the index next week will be 3930 and 4130, with 4080 the key short term pivot level.
By Michael Hevern
DMX 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.
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