Well, investors had an eventful week, as promised, and next week European Union leaders will likely keep traders on edge as they meet for a summit on 28-29 June.
The week started off on a positive note as the pro-bailout New Democracy party came in first in Sunday’s Greek national election, and they have now sworn in a new coalition parliament.
Trader sentiment was also boosted by the news out of the G20 meeting, where European officials pledged to take “all necessary policy measures” to defend the euro currency union, as world leaders endorsed a road map for tighter integration to cut borrowing costs and prevent further damage to the global economy. However German Chancellor Angela Merkel declined to commit to direct sovereign debt purchases through the eurozone bailout fund, highlighting that there is still work to do to get consensus on this initiative. The next critical meeting is the summit of European Union leaders in Brussels on 28-29 June.
US stock markets traded to one-month highs this week, having recovered 6% from the recent lows. However they sold down sharply overnight, in a delayed reaction to the Fed. The markets were at key levels, testing the 50% retracement levels from the May sell-off. The Federal Reserve has now committed to extending its Operation Twist program to replace short-term bonds with longer-term debt by $US267 billion through to the end of 2012, however traders were disappointed because they had speculated on a more aggressive QE3 approach. It is worth reflecting that the previous stimulus measures by the Fed, including two rounds of quantitative easing through asset purchases known as QE1 and QE2, helped the S&P 500 double from its bear-market low in 2009, while US Treasury yields reached the lowest on record amid demand for safety away from the eurozone debt crisis.
European stock markets gained over the past couple of weeks, but are now running into 50-day resistance levels. The Greek market has been the standout, up around 25% from its recent lows as a new coalition government has been sworn in, ending the political limbo that began at the failed election on May 6th. German Chancellor Angela Merkel is still reluctant to allow the use of Europe’s dual bailout funds, the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), to buy debt of countries like Italy and Spain and provide liquidity in the eurozone financial system.
In commodities crude-oil has plunged to an eight-month low, as US inventories hit 22-year highs. Gold prices pulled back this week, as the US dollar rose in the absence of a QE3 announcement. The CRB commodities index closed at its lowest level since 2010, and mining and energy stocks across the globe remain under pressure near term.
Asian stock markets have generally taken their cue from Europe this week, and sold off heavily yesterday on the back of Chinese manufacturing data declining for an eleventh month out of the past twelve. HSBC preliminary data shows that Chinese manufacturing is set to contract in June, matching the streak during the global financial crisis (GFC), signaling that the Chinese government stimulus has yet to reverse the domestic economic slowdown. The Chinese stock markets fell below a key level overnight, dragging the benchmark index to the lowest level in 3 months, after a report showed Chinese manufacturing shrank for an eighth consecutive month in June. Traders are concerned that the growth slowdown is deepening in China and the sovereign debt issues are impacting corporate earnings going forward. Selling was broad-based but the miners and energy stocks suffered the brunt of the selling. The Japanese market remains around 1-month highs.
The Australian market has traded sideways again this week, and is again trying to hold around the key 4000 level. Sentiment has remained cautious, driven by news from the eurozone and hopes of central bank easing. Major market defensive 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 4000 level will now be a crucial support 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 3980, in which case we could see the 3950 and then the 3850 levels tested.
The S&P/ASX 200 index is currently trading at 4049 and is testing breakeven levels for the year. Key levels for the index next week will be 3930 and 4160, with 4080 the key short term pivot level. Tonight traders will be reacting to Goldman Sachs’ recommendations to clients to build on their short positions in the broad S&P 500 index, on expectations of further economic weakness. Also, Moody’s Investors Service has announced further downgrades of the credit ratings of 15 lenders and securities firms with exposure to the global capital markets.
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 (the EU leader summit), now that China is facing another month of contracting manufacturing activity, and the US, as the US markets back off their 3-week highs. Monitor the performances of Spain, Italy, China and the US dollar for a guide to the future direction of commodities and equities prices.
Contact me at D2MX Trading on 1300 610 024 and I can help you trade using a number of strategies that will give you the tools to navigate this market and help you boost your returns on investment. For Buy and Sell recommendations on ASX listed companies register for a free trial of MDS Financial Research.
By Michael Hevern
DM2X Trading Desk
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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