Online Stockmarket Trading Update

Weekly Market Wrap – Earnings, Economy, Expectations

Overseas markets started the week trading higher after a sell-off on Friday last week. Markets (with the exception of Japan and China) are generally either at, or just above, the downtrend line that has been in place since the April sell-off, and they are also above their 200 day moving averages. This is obviously a positive and has been helped by the generally strong earnings season from the S&P 500 companies in the U.S. The big test for the European markets will be the investor reaction to the banks “stress test” reports due out tonight.

Copper has also been a highlight this week breaking into new monthly highs. This is another positive for the markets as copper is considered a bellwether for underlying economic strength.

US Markets

The U.S. markets have traded higher for three out of four of the past days and have broken the downtrend line that has been in place since April. The reporting season has progressed well this week as the majority of companies have beaten lower expectations, however revenue growth has disappointed. The standout performers were those multi-national companies that do not rely on the underlying strength of the U.S. domestic economy. IT and transport companies have beaten forecasts and this is another good sign for the ongoing economic recovery. However the Fed Chairman Ben Bernanke shook the markets on Wednesday when addressing the Senate by saying that the outlook for the U.S. economy remains “unusually uncertain”, and that the Fed plans no specific steps “in the near term” to try to fuel the struggling recovery. Investor concerns eased overnight though, as he reiterated that the Fed will remain accommodating and it is prepared to take further action to support the economy if the economic outlook deteriorates.

Overnight the Dow closed up 2.0% at 10,325, while in the broader market the S&P 500 index was up 2.3% at 1,094 and the tech-heavy Nasdaq ended up 2.7% at 2,246.

European Markets

The European markets have spent the week trading in a tight range – investors were not keen to take a substantial position prior to tonight’s release of the bank “Stress Tests” results. The tests will review 91 banks (14 from Germany, 6 from Greece and 4 from the U.K.) to determine whether they could withstand a shrinking economy and a drop in government bond values (assuming a 17 percent loss in Greek government debt and 3 percent loss on Spanish bonds). Overnight in London the FTSE 100 index closed up 1.9% at 5,314, the German DAX up 2.5% at 6,142, while in France the CAC was up 3.1% at 3600.

Asian Markets

The key news in Asia continues to point to a slowing economic recovery. Investors have taken the view that this will encourage the Chinese government to ease its monetary policies, as it appears to have engineered a “soft landing”, at this stage. The Chinese market looks to be finding support at current levels. The Japanese market has pulled back again, after growing concerns that the strong Yen will impact their exports. Overnight in China, the SSE composite closed up 1.1% at 2,562, while in Hong Kong the Hang Seng Index was up 0.5% at 20,590 and in Japan the Nikkei 225 Index was down -0.6% at 9,221.

Commodities

Oil prices held up this week on improving investor sentiment in the U.S. and the plugging of the Gulf of Mexico spill. The benchmark crude NYMEX for September delivery rose 3.5% (or $US2.74) to settle at $US79.30 a barrel. Copper prices rose to new monthly highs, above the key $US3.00 a pound, up 2.7% (or 7 cents) at $US3.1675 a pound. Gold is looking to find support – August gold was up overnight $US3.80 at $US1,195.60 an ounce.

ASX News

The Minerals Resource Rent Tax (MRRT) raised it head again this week, with those miners who were not invited to participate in the negotiations of the proposed tax threatening to resume the damaging advertising campaign.

Overseas market movements have dictated Aussie investor sentiment, but China and the U.S. markets appear to be finding support at current levels.

Our View

Markets have drifted higher as trading volumes started to pick up towards the end of the week. Overseas markets have the potential to punch through key resistance levels next week, particularly if the U.S. earnings season continues to support sentiment and the European markets react well to the bank “stress tests” tonight. The key support level on the ASX is still around 4,200 and the key levels for our index next week are 4550 and 4350, with pivot at 4450.

Overseas markets are keenly anticipating the EU bank “stress tests” due out tonight. In Australia the upcoming elections will add to the uncertainty in the markets near term, particularly on the MRRT tax front.

The S&P ASX200 is currently trading around 4450.

By Michael Hevern
Head of Research