Key Global Markets Approach 2011 Highs
Australian shares have traded higher this week after positive leads from key markets in the U.S. and Europe, news of surprisingly good jobs data both locally and in the U.S, and also U.S. manufacturing data surprising to the upside.
Locally the RBA left rates on hold as expected, and the unemployment rate remained steady at 4.9% but with improving jobs growth. The details of the carbon tax will be revealed on Sunday, while in the U.S. the non-farm payrolls report is due out Friday night and the earnings season starts next week.
Key European and U.S. markets are set to test their 2011 highs near term, while commodity prices have continued with their recent gains, with copper prices at 10-week highs.
U.S. Markets
U.S. stock markets have continued higher and look set to test their 2011 highs. Investor sentiment was buoyed by better-than-expected Institute of Supply Management (ISM) data showing that the U.S. manufacturing sector expanded solidly in June, with the ISM Purchasing Managers Index (PMI) up at 55.3 in June (from 53.5 in May). This supported the conclusions from the Chicago PMI which came in well above expectations at 61.1 – there is generally an 80% correlation between the two readings. U.S. investors have had a good week after their 4th of July celebrations.
Key milestones for the U.S. near-term are the non-farm payrolls employment report which is due out tonight and then the start of the earnings season next week. Investors will also be mindful of the current debate being held in Washington over the $US14.3 trillion debt ceiling and the growing fiscal deficit, scheduled to be voted on in early August. There would be huge ramifications if the deal is not passed on the 2nd of August, as this could trigger an unprecedented default on U.S. debt.
Overnight the Dow Jones closed up 0.7% at 12,720, the S&P 500 index closed up 1.1% at 1,353, the Nasdaq ended up 1.4% at 2,873, and the smaller cap Russell 2000 was up 1.5%.
European Markets
European stock markets have held up surprisingly well, and now that the ECB has acted to support Portugal after it was downgraded earlier in the week, markets should find support at these levels. The European Central Bank is supporting Portugal by suspending the minimum credit-rating threshold on the Portuguese government debt used for collateral with the central bank, and this led to the Portuguese market jumping 1.8% overnight. The central banks have made announcements on their interest rates this week which had already been priced into the markets. As expected the ECB decided to lift interest rates by a 0.25 points, to 1.5%, while the Bank of England left its rate on hold.
Overnight in London the FTSE 100 index was up 0.3% at 6,054, the German DAX was up 0.5% at 7,471, while in France the CAC was up 0.5% at 3,979.
Asian Markets
Asian stock markets continued higher this week with Chinese bank shares rising in Hong Kong on hopes the interest rate increase by the Chinese central bank on Wednesday will be its last for the year. Also there were sharp declines in Japanese utilities due to growing uncertainty after the government said it is considering special stress tests for all nuclear plants. However for the week the Japanese Nikkei Stock Index ended at its highest level since the March earthquake and is at 4-month closing highs. Chinese banking shares mostly rose after the People’s Bank of China (PBOC) lifted benchmark deposit and lending rates by 0.25 of a percentage point after market on Wednesday, in order to keep inflation in check.
Overnight in China the SSE Composite was down -0.6% at 2,794, while in Hong Kong the Hang Seng Index was up 0.1% at 22,530 and in Japan the Nikkei 225 Index was down -0.1% at 10,071. The South Korean KOSPI was up 0.4% for the session, while the Indian market was up 1.9%.
Our View
The Australian share market has built on the strong gains from last week as the resolution of the Greek situation has enabled fund managers and traders to push the market higher again, despite the Portuguese debt downgrade (thanks to the ECB’s actions).
The S&P/ASX 200 index has bounced off its March lows and is now breaking above its 50-day moving average. Look for the market to continue with its gains near term, but also monitor the progress on the proposed carbon and mining resource taxes.
We noted recently that the copper price would lead the markets, and now we see it trading at 10-week highs while crude oil again pushes up against the $US100 level. The U.S. earnings season begins next week and this could be the catalyst for a move higher, with many of the analyst earnings forecasts ratcheted down because of the soft June economic data showing slowing economic growth.
If we see a follow-through in momentum in the key overseas markets, and providing there are no nasty surprises in the government’s carbon tax, the ASX is set up to run higher. Banks are attractive on a yield basis, and many blue chip stocks are cheap on a valuation basis.
The S&P/ASX 200 is currently trading at 4650 and has broken above short-term resistance. Key levels for the index next week will be 4730 and 4550.
By Michael Hevern
Head of Research
