Last week we talked about traders seeing green, as they anticipated a coordinated monetary easing effort across the globe. However traders were starting to turn a little green themselves by mid-week, as stock markets across the world sold down and the coordinated global central bank easing failed to materialise.
The selling was persistent in the European markets, as the eurozone debt crisis was worsening with the cost of borrowing for Italy and Spain reaching unsustainable levels (over 7% for 2- and 10-year debt). It also looked increasingly likely that Greece would be unable to meet the austerity restrictions needed to qualify for its bailout, and Spain looked set to be the next in line to need a bailout. The Spanish stock market regulator, the CNMV, announced a ban on all short selling for the next three months, citing the “extreme volatility” that equities are now experiencing, while in Italy the regulator announced a short-selling ban for the next week on some banking and insurance shares.
In the US markets have traded sideways this week, as the corporate earnings results have been mixed. Asian markets were subdued, and by mid-week the Japanese market had reached 7-week lows, Hong Kong reached 5-week lows and China 4-year lows.
Now for some good news: investor sentiment performed an about-face overnight and traders across the globe started buying, after the ECB President Draghi pledged to do “whatever it takes” to preserve the EU economic zone. Stocks surged across the board, led by financials, but the telecommunications, consumer, mining and energy sectors powered higher, as traders sought “risk-on”.
US stock markets surged on the ECB comments, recovering overnight to near 2-month highs, after spending most of the week down around their 200-day moving averages. The earnings season continues, and of the 263 S&P 500 companies that have reported 72% have topped analysts’ estimates on the earnings side, but only 43% have beaten on revenue, which is disappointing.
European markets managed to rebound overnight, with the French market surging over 4%, while the German market has bounced 3.5% from its weekly lows. The Stoxx Europe 600 Index jumped 2.5% for its biggest gain since the end of June. The gauge had dropped -4.4% in the previous four sessions, with traders hitting the sell button as Spain and Italy have to pay unsustainable rates for their debt borrowings. The ECB reassurances saw Spanish 10 year bond yields fall below 7%, while Spanish 2-year yields fell the most this month after ECB President Draghi said that addressing high yields on sovereign debt was within the central bank’s mandate. The ECB was responding to calls by Spanish policy makers asking the central bank to fight a renewed round of financial turmoil that pushed the country’s bond yields to euro-area records this week. Italian bond yields also subsided.
Asian markets are rebounding today, but the Chinese market remains at 4-years lows. Chinese officials said that government easing will be sidelined near-term while they watch the outcomes of recent interest rates cuts and as bank lending is starting to improve. The estimates forecast for GDP growth next quarter are mixed, ranging from 7.4% to 7.6%, which is around the government benchmark of 7.5%.
In commodities crude-oil prices eased to above $US89 this past week, as US inventories picked up again with tensions in the middle east seen as easing. The gold price has bounced in the past couple of sessions, after the ECB’s reassurances and as QE3 looms again. Gold is again trading above $US1,600. Copper prices have also moved higher, bouncing off their 200-day moving average.
The Australian market is in the process of forming a second higher low (as seen on today’s chart) and is set to test 2-month highs again. If the global central banks do act, this would be a catalyst for our market to push higher, and will give a badly needed boost to our mining and energy stocks. The 4200 level is the next pivotal resistance level and 4120 is the critical support level for next week.
In our market the defensive sectors continue to outperform, with banks, Telstra, Real Estate REITs and health-care stocks trading higher, as investors seek out stocks that can deliver consistent yield in this low rate environment, and as we move into the dividend season in August. The industrials, materials and energy sectors are bouncing off key short-term support levels, and we appear to be seeing short covering near-term. The banks have surged and are testing 3-month highs, as investors turn to dividend yield. However we are seeing some buying in the energy and materials sectors as investors seek “risk-on”, but we need to see follow-through next week to continue the upward momentum for the market.
Investors should have protection in place for their capital, and could look to reduce their risk by using options and warrants strategies. Look to pick up value stocks that pay consistently high dividend yields, when they reach your buy levels. Last week we said “it may be time to start to nibble away at materials and energy stocks”, which proved fortuitous as they held on to recent support levels.
Remain attuned to news from overseas, particularly from the eurozone, China and the US, as the US reporting season continues. Also monitor the performance of Italian and Spanish borrowing costs, 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 4182 and is trying to close the week around the 2-month trading range. Key levels for the index next week will be 4120 and 4280, with 4200 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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