Markets have eased back from key levels this week. The US markets remain at multi-year highs, but China remains in a double-top formation. The Australian market, and particularly the materials and energy sectors, are being weighed down by renewed concerns over slowing growth in China and the eurozone.
The US stock markets began the week on a positive note, following on from the US banks’ “stress test” results, which found 15 of the 19 banks tested passed an evaluation of their ability to weather another economic downturn. However as the week progressed traders took profits, due to renewed concerns over slowing global growth, triggered by disappointing Chinese manufacturing data and weak economic signals from the eurozone. On a positive note the Volatility Index is still hovering around 4-year lows at 15, which means it’s cheap to insure stocks from any significant falls near term, and this would suggest that we are only seeing a period of profit-taking, at least near-term. Remember we have the end of the quarter coming up and the US markets are set up for their best Q1 performance since 1998. In the broader markets growth-sensitive sectors have been the hardest hit, including materials and energy.
European markets have been sold-down in every session this week, snapping an 8-session winning streak as they encountered some profit-taking. Fears of a Chinese slowdown have weighed on mining stocks, after earlier comments from BHP about flattening Chinese iron ore demand. Global growth concerns continued to weigh on trader sentiment as sovereign-debt yields rose in Spain and Italy. Spanish 10 year bonds rose, with yields at their highest level in a month. Overnight the European session began on a sour note with disappointing Chinese manufacturing data. The HSBC preliminary purchasing managers index (PMI) fell to a four-month low of 48.1 in March, confirming a slowdown in the world’s second-largest economy. Euorzone data also disappointed with the Markit eurozone purchasing managers’ composite output index falling to a 3-month low of 48.7 in a preliminary reading for March (down from 49.3 in February). Even though eurozone markets have eased back this week, they are still on track for a cracking first quarter performance.
Asian markets are rolling over from multi-month highs, with the Japanese Nikkei only just above 10,000, while the Chinese Shanghai Composite Index has formed a double top near-term and is sitting on its 50 day moving average. Across the region mining and energy stocks have been sold down after yesterday’s Chinese PMI data which is confirming slowing growth. Chinese manufacturing activity fell sharply in March, with the HSBC survey index at 48.1, down for a fifth consecutive month (a number below 50 indicates contraction). The rate of booking new orders at Chinese factories fell to a 4-month low. The miners have led the recent falls as commodity prices eased and the Australian dollar fell sharply on the Chinese PMI news, reflecting Australia’s dependence on Chinese growth.
Commodity prices have been under selling pressure this week on the back of a rising US dollar. Even crude-oil prices eased and copper has again been unable to trade above $US4.00. It’s now sitting on its 200 moving average support.
Australian mining stocks have been in focus this week, with the passage of the Mineral Resources Rent Tax (MRRT) that confirms Australia as one of the world’s best tax environment for miners. Given the diluted MRRT is much lighter than proposed new tax regimes in Indonesia and across Africa, it is likely to attract miners. Note the new mineral resource tax only applies to iron ore and coal, while gold, copper, nickel and uranium miners are all unaffected by the MRRT. At a rate of 30 percent, it is well below the 40 percent petroleum resources rent tax introduced by the Labor government in 1986. However BHP’s comments that iron ore demand from China is flattening weighed on sentiment. BHP forecasts that world iron consumption will ease from 6.1% to 3.5% in the next decade and world seaborne demand will halve from 8.4% to 4.4% in the next decade.
The disappointing Chinese PMI data also weighed on our markets. The 4300 level remains an obstacle for our market, as our materials sector has suffered from the lower commodity prices and the concerns out of China.
The Aussie market has again retraced from its 200 day moving average, and the index is now trying to find support at around 4250, a key short-term pivot level. On the S&P/ASX 200 the 4180 level is the crucial support level and 4320 becomes increasingly more important each time it is tested. This week we found resistance around the 4310 level but we are now again trying to hold support.
A number of the S&P/ASX sectors are holding above their 150 day moving averages (MAs), having found support last week. These include Financials, Health Care, Technology and Utilities. The Consumer Discretionary, Real Estate, Telecoms and Energy sectors are looking to find support above their 150 day MAs, while the Materials and Consumer Staples sectors continue to underperform and are below their 50 day support levels.
Traders should be looking to protect their profits in this market and reduce their risk by using options strategies. The MDS Financial Advisory Services team can help with these trades. Call me on 1300 610 024 for further information. Investors should also be looking to utilise options strategies to protect their positions and profits, as options are a relatively cheap form of insurance, as volatility is low, and you can also leverage yourself for breakout trades as they occur.
Remain attuned to the news from overseas, particularly from the eurozone and China in relation to easing policies, and the US as their markets hold above multi-year highs. Remember we have the end of the quarter coming up next week. Monitor the performance of 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 4261 and is holding above the key medium-term pivot level around 4180. Key levels for the index next week will be 4180 and 4320, with 4250 the key short term pivot level.
By Michael Hevern
MDS 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 MDS Financial Services Pty Limited ABN 28 088 190 283 AFSL No. 333298 (MDS), 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 MDS Financial Services Pty Ltd, 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.