Traders began the week happy with the assurances from the European Central Bank that it would do “whatever it takes” to preserve the euro. However as the week progressed traders chose caution and actually hit the sell button, in disappointment over the inactivity by the US Federal Reserve and the ECB in relation to further easing. The selling has been broad-based in the past couple of sessions, with the European markets looking to break their eight-week streak of consecutive gains.
Overnight US stock markets fell for a fourth day, on the back of disappointing global manufacturing data and news that the ECB and the Fed will delay any additional monetary easing until at least September. The three benchmark indexes fell around -1%. The S&P 500 has slid -1.5% in the past week and is setting up for its first decline in four weeks. Falls were broad-based, with the energy, materials and the financial sectors leading the way down.
US economic news continues to disappoint, with PMI manufacturing data weaker, as orders placed with US factories unexpectedly declining in June. We also saw the biggest decline in bookings for non-durable goods in over three years, confirming there is less demand for business equipment and goods. US consumer confidence also dropped last week to the lowest level in two months, due to mounting concern over the state of the economy, while consumer spending stagnated. Just to add a further dampener to investor confidence, there was a mini “flash crash” yesterday, that will cost market maker Knight Capital trading losses of over $US440 million. An initial review of the problems by the NYSE exchange revealed that nine of the Dow Jones Industrial Average companies lost almost $US1 trillion in combined market value (these firms included Alcoa, Amex, BofA and AT&T).
European stock markets have backed off four-month highs in recent sessions, as the ECB failed to take immediate action and corporate earnings disappointed. The Stoxx Europe 600 index declined -1.3% on the prospect of slowing global growth. Overnight the European Central Bank (ECB) President Mario Draghi failed to live up to his reassurances that the ECB would do “whatever it takes” to support the euro, saying that the ECB is working on the issue, but will not take immediate steps to support the economy. The cost of funding in Spain has again shot up to 7.16%, and in Italy it’s again approaching 6.4%. These high levels are unsustainable in the medium-term, and the Spanish and Italian markets plunged around -5% on the news.
Traders initiated a global sell-off in a case of “sell on the news!” as ECB President Draghi signaled the ECB intends to join forces with governments to buy bonds in sufficient quantities to ease the eurozone debt crisis, while conceding that the German Bundesbank has reservations about the plan. ECB officials are working on the plan and details will be fleshed out in the coming weeks, he said, after keeping the benchmark interest rate on hold at 0.75 percent. Financial markets and politicians had ratcheted up pressure on the ECB to act after Draghi pledged last week to do “whatever it takes” to save the euro, battered for almost three years by spiraling costs of borrowing for the PIIGS countries from Spain and Italy to Greece. The Bundesbank had reiterated last week that it opposes further purchases of sovereign debt by the ECB, as they blur the line between fiscal and monetary policy. There is going to be a long path to a resolution to the ongoing crisis.
Asian stock markets are finishing the week lower, with sentiment being driven by overseas developments, as the US Fed and now the ECB disappoint by delaying easing. Most Asian stock markets have fallen across the region, led by the mining and financials sectors, as investors chose to step aside as the policy announcement by the European Central Bank and the Federal Reserve disappointed. The Chinese market continues to languish at 2009 lows.
In commodities crude-oil prices eased to around $US87 this past week, as concerns grew about slowing global growth. The gold price has retraced in the past couple of sessions and is now trading below $US1,600 again. Copper has moved lower towards 12-month lows and is below its 50- and 200- day moving averages.
The Australian market is retracing from 2-month highs again, due to the global central banks’ inaction, but our mining and energy stocks are showing some much needed signs of recovery. The 4200 level is the current pivotal 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 hold on to their stocks for the dividend season this month. The industrials, materials and energy sectors are retracing off key 50-day resistance levels, despite the short covering we have seen near-term. The banks have surged again and are at 3-month highs, as investors turn to dividend yield. We are seeing some buying in the energy and materials sectors as investors are seeking some “risk-on”, but we need to see follow-through next week to continue the upward momentum for the market, which may be difficult with the disappointment over delays in quantitative easing.
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. In today’s Analyst’s Eye we review some Golden Opportunities for investors.
Remain attuned to the news from overseas, particularly from the eurozone, China and the US, as the US release their monthly employment report and as Aussie companies begin their reporting season. 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 4228 and is trying to close the week around its 200-day moving average, which will be a key level for next week. Key levels for the index next week will be 4150 and 4280, with 4200 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.
Investment Adviser D2MX Trading
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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.