Markets have spent most of the week in limbo, but surged overnight as ECB President Mario Draghi lived up to his promise to do “whatever it takes” to preserve the euro. US markets jumped to 4-year highs on the news, while European markets resumed their upward momentum after having been up for eleven consecutive weeks.
US stock markets hovered around key levels all week but surged overnight, as investors received the news they were waiting for from the ECB. The three benchmark indexes surged over 2.1%. The materials, financials, industrials and energy sectors all jumped around 2.2%. The S&P500 surged above 4-year highs, after spending the past three weeks hovering around the 1400 level. Traders rushed to buy stocks as European leaders announced their bond-buying plan to address the eurozone debt crisis, and last week the Federal Reserve Chairman Ben Bernanke said the Fed is open to providing stimulus. In economic news the US service industries expanded in August more than was expected, according to the Institute for Supply Management (ISM) non-manufacturing index. The Labor Department will release Non-Farm payrolls employment data tonight, with analysts expecting overall hiring to have climbed by around 130,000 jobs in August, while the jobless rate is expected to remain stubbornly at 8.3 percent for a second month, and above the 8 percent mark for a 43rd straight month.
European stock markets resumed their upward projection, surging overnight after ECB President Mario Draghi unveiled an unlimited bond-buying program. The Stoxx Europe 600 Index jumped 2.3%, its biggest increase since August 3rd, and this index is now up 16% from its June lows. Overnight trading volume surged on the Stoxx 600 and according to Bloomberg was 72% higher than the average of the last 30 days. The ECB announced that it will target government bonds with maturities of one to three years, including longer dated debt that has a residual maturity of that length. The key to this program is that the purchases will be fully sterilised, meaning that the overall impact on the money supply will be neutral, and the ECB will not have seniority.
The ECB has left its benchmark interest rate at a record low of 0.75 percent and the Bank of England kept its rate at 0.5 percent and held its bond-purchase target at $US597 billion. Across the region the gains were led by the financials and growth-sensitive sectors, like materials and energy. The three benchmark indexes climbed around 3% and all 19 industry groups in the Stoxx 600 finished in the green. The Spanish market outperformed up 5%, led by the Spanish banks which were up as much as 8% for the session.
Asian stock markets fell for the month of August, the first monthly fall since May, as investors looked for some direction over whether central banks will introduce more stimulus. Data from Japan, China and South Korea has signalled their economic slowdown is deepening, and this is highlighted by the Chinese economic slowdown which is worsening. The official Chinese government Logistics and Purchasing survey showed factory output unexpectedly contracted for the first time in nine months in August, fuelling speculation policy makers will announce more measures to drive growth. Overnight Goldman Sachs Group cut its forecast for Chinese economic growth, as reports due this weekend are expected to signal further slowing in the world’s second-largest economy. The Chinese market is still languishing around 4-year lows and the Hong Kong market is at 5-week lows.
In commodities, gold has rallied to a 4-month high, cracking the $US1,700 level, as the US dollar extended its fall to new 2-month lows and Treasury yields touched the lowest in more than a week due to speculation the Federal Reserve will add to monetary stimulus. Crude-oil is backing off 3-month highs, testing long-term technical resistance, as the futures settled around its 200-day moving average. Copper has performed well in anticipation of further stimulus and is testing 4-month highs.
The Australian market is finding support around its 50 day moving average, due to the prospect of coordinated global central bank action. It has been a busy week with the RBA leaving rates on hold, disappointing GDP and unemployment unexpectedly falling even as employers cut their payrolls. The mining and mine services sector has been hard hit, particularly those with exposure to the iron ore industry, as the mid-tier miners and even Fortescue, start to lose out on margins if iron ore continues to slide below $US90/tone.
In our market the defensive sectors have seen support, as traders pushed Telstra, Real Estate REITs and health-care stocks higher this week. The health-care, Real Estate REITs and info tech sectors are all making new yearly highs. The utilities, financials and energy sectors have seen some profit-taking this week. The financial sector remains at 12-month highs. The industrials and materials sectors faced heavy selling earlier in the week, but are attempting to find some support.
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. 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 4337 and is looking to close the week modestly higher. Key levels for the index next week will be 4260 and 4400, with 4320 the key short term pivot level. Traders have received the news they wanted from the ECB, and are now hanging out for the US employment report tonight and the next Fed meeting on 12 September, and news from Germany regarding a ruling on the ECM.
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Michael Hevern
Investment Adviser D2MX Trading
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.
Tags: ASX, ASX News, commodities markets, European Central Bank, mario draghi, US markets, Weekly Wrap
