Traders have taken profits off the table this week. Markets are hovering around multi-month and multi-year highs, while trading volumes have hit lows not seen since the GFC in 2008 and the delay in central bank movement towards further stimulus is causing impatience among traders. US investors are getting mixed messages over the potential for QE3, as their market backs off 4-year highs, while in Europe the markets have pulled back from eleven consecutive weeks of gains, as profit-takers stepped in. The Chinese market remains at 4-year lows, with concerns over their faltering economy translating into disappointing corporate earnings for Chinese companies.
US stock markets have traded in a tight range for the past four weeks, but retreated overnight as investors took profits ahead of the Jackson Hole summit. The trading volumes remain at lows not seen since 2008 (excluding days surrounding holidays). In the broader markets the growth-sensitive sectors led the falls with the Materials, Technology and Energy sectors all down. Even though the three benchmark indexes closed overnight in the red, they are still on track for a third consecutive month of gains. Investors are keenly awaiting the speech from the Federal Reserve Chairman Ben Bernanke at Jackson Hole, Wyoming, tonight, where he is expected to critique the current economic situation, but is likely to fall short of announcing a move to QE3, as policy makers have already said they are prepared to provide new stimulus “fairly soon” if the US economic conditions deteriorate further. The next FOMC Fed meeting is on 15 September.
European stock markets have fallen for a third straight session, as economic data is confirming the global slowdown. The benchmark Stoxx Europe 600 Index is down -1.1% for the week, but is currently up 1.4% for August. Traders are uneasy, as they await action from the ECB to address the worsening eurozone debt crisis. Across the region the growth-sensitive sectors led the declines. The German market, the largest in the eurozone, looks set to close weaker for a second week, as data showed German unemployment increased for a fifth straight month in August while economic confidence in the eurozone fell more than economists forecast to a three-year low. German business confidence also fell for a fourth straight month in August as the sovereign debt crisis slowed growth in Europe’s largest economy. The Ifo institute in Munich said its business climate index dropped to 102.3 (from 103.2 in July), the lowest reading since March 2010. German economic growth has also slowed to 0.3 percent in the second quarter from 0.5 percent in the first as the debt crisis hit demand for exports and prompted companies to postpone capital investments. Traders are still waiting on the European Central Bank (ECB), which is expected to formulate a bond-buying plan, and for the representatives of Greece’s international creditors to issue a progress report (in September), and also for a German court to announce its decision on the legality of the eurozone’s proposed permanent bailout fund. The ECB President Mario Draghi has pledged to do “whatever it takes” to preserve the euro and the European political leaders agreed to ease repayment terms on loans to Spanish banks, but it appears the debt situation is worsening in the Spanish region.
Asian stock markets have pulled back again for a second consecutive week. The MSCI Asia Pacific Index has wiped out its gains for the month this week, as the selling has been in the growth-sensitive sectors. This index has jumped 10% from its June low as traders anticipate that the US, Europe and China will take action to support economic expansion. Traders across the region have sold-down mining and energy stocks this week, as economic reports out of China, Japan and Korea have confirmed slowing growth and that confidence among manufacturers, particularly in South Korea, remained at the lowest level since the GFC. Exports across the region are being hit by the weak eurozone demand due to the worsening debt crisis. In Japan the government has lowered its assessment of the Japanese economy, cutting its view on personal consumption, home-building, exports, imports and industrial production. In China industrial company profit has fallen, but there has been speculation some state-owned companies will announce share buybacks, after an unidentified official at the China Securities Regulatory Commission said that publicly traded companies, especially those whose stock prices are below their book values, have an obligation to buy back their own shares. However the Chinese market is still down the most in six weeks and is finishing at February 2009 lows.
In commodities, gold is easing back from 4-month highs, as the US dollar fell to a 2-month low and Treasury yields touched the lowest point in more than a week due to speculation that the Federal Reserve will add to monetary stimulus. Crude-oil rose to a three-month high, but is backing off the $US98 level in the near-term, and is looking to find support above its key long-term technical level as the futures are still above its 200-day moving average. Copper continues to hover above 4-month lows.
The Australian market is backing off 3-month highs for a second week, due to impatience over the length of time it is taking for coordinated global central bank action, and our mining and energy stocks are seeing heavy selling as profit-takers stepped in after a 4-week rally, after the Chinese Flash PMI disappointed. 4330 is the current pivotal level and the 4250 level will be the critical support level for next week.
In our market the defensive sectors have rebounded, as traders have locked in their dividends. Our earnings season reporting has been mixed. Companies that disappoint are being punished through their share prices. Telstra, Real Estate REITs and health-care stocks are all rebounding this week. The industrials, materials and energy sectors have seen profit-taking, but the financial sector remains at 12-month highs and the health-care sector is at all-time highs. Traders are hanging out for news in the form of a coordinated effort towards monetary easing, but this will not happen until at least mid-September.
Investors should have protection in place for their capital, and could look to reduce their risk by using options and warrants strategies.
Remain attuned to the news from overseas, particularly from the eurozone, China and the US, and locally as the Aussie stock reporting season nears an end. 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 4309 and is looking to close the week lower again. Key levels for the index next week will be 4250 and 4380, with 4330 the key short term pivot level.
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.
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.
Disclaimer: Using leverage to invest can be a two edged sword, as it can magnify your returns when the stock price rises, but will in turn magnify the losses if the trade does not perform as expected.