Investors are in for an eventful week next week, with the Greek elections, the G-20 meeting and the US FOMC meeting. Traders are unsure which way the central banks will move near-term, but no doubt the escalating eurozone debt crisis will be high on the agenda.
US markets are edging to 3-week highs ahead of next week’s FOMC meeting, while economic data continues to point to a slowing domestic economy. In testimony before Congress recently, Federal Reserve Chairman Ben Bernanke stopped short of signaling new stimulus measures and indicated that the EU needs to get its own house in order, which disappointed traders. However when the Federal Reserve holds its FOMC meeting it is expected to discuss further economic stimulus efforts to follow after “Operation Twist”, which is due to finish at the end of the month. The US dollar index has been easing on anticipation of some additional monetary easing near-term and next week will be crucial.
The eurozone markets kicked off the week with news that Spain had requested up to 100 billion euros ($US125 billion) in loans from the European Union to assist its banks. However statements about the deal left several open questions, including the exact amount of aid the country will need and how the funds will be distributed. The aid needs to be provided by the European Financial Stability Facility (EFSF) and the European Stability Mechanism. As the week progressed traders were not convinced that Spain’s agreement to seek bailout funds for its banks will restore confidence in the Spanish economy. Spanish and Italian bond yields have surged this week as investors queried the terms of the Spanish bank “aid” deal.
Adding to the gloomy sentiment in the eurozone, Fitch Ratings downgraded 18 Spanish banks’ long-term credit ratings in a move that was linked to its earlier downgrade of Spain’s credit rating. Moody’s Investors Service has downgraded Spain and Cyprus, while Switzerland’s central bank said that Credit Suisse Group AG must increase its capital this year due to the eurozone debt crisis. Also weighing on traders’ minds are the upcoming elections in Greece, as the outcome may well determine the country’s future in the 17-nation, eurozone bloc. According to polls, 75% of Greek citizens want to keep the euro. Overnight in Greece the market surged with its biggest rally in more than nine months, while their banking sector index rocketed 21%, amid speculation that New Democracy, the party that backs an agreed bailout for the nation, may win the June 17 elections.
Asian markets are backing off 3-week highs and the Chinese market is trying to find support after the Chinese central bank said it would lower benchmark interest rates on loans and deposits by 25 basis points, for the first time since 2008. Chinese data showed exports and imports growing, but inflation cooling more rapidly than expected, amid an economic slowdown. Credit Suisse and Deutsche Bank reduced their forecasts for Chinese growth this year, citing weakness in exports and in investment dragging on the world’s second-biggest economy. The predictions indicate the weakest Chinese growth since 1999 and compare with a 9.2% expansion last year. Credit Suisse cut its estimate to 7.7% from 8%, while Deutsche Bank lowered its forecast to 7.9% from 8.2%. Credit Suisse suggested that productivity gains and a restoration of the economy’s strength will require the Chinese government to break monopolies in banking and utilities, open the services industry, and deregulate interest rates and the exchange rate, and also highlighted that government stimulus could moderate the downside risks to growth.
The US dollar continued to back off the high levels not seen since mid-2010, which has eased the selling pressure on the commodities which are priced in US dollars. Crude-oil is hovering around 8-month lows, copper is at 7-month lows, and silver is hovering around 15-month lows. Mining stocks across the globe remain under pressure near term, however gold continues to rise and is testing 5-month highs.
The Australian market has traded sideways this week, and is trying to hold 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, Realestate 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 on the back of lower commodity prices, but banks are tentatively looking to find some support as investors turn to dividend yield.
On the S&P/ASX 200 the 4120 level will now be a crucial resistance level and the 4080 level is again pivotal 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 are looking to pick up value stocks that pay consistently high dividend yields, when they reach our buy levels.
Remain attuned to the news from overseas, particularly from the eurozone (Greece and the G-20), now that China cut interest rates in its move towards policy easing, and from the US, as those markets test their 3-week highs. Monitor the performance 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 4036 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
D2MX 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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