EU Debt Resolution Fuels Risk Appetite
Australian shares have traded higher this week after some M&A activity and positive leads from key markets in the U.S. and Europe, and despite PMI data out of China showing manufacturing contracted last month. News Corp. shares fell as the U.K. phone-hacking scandal escalated with the arrest of News International chief executive Rebekah Brooks, but News Corp shares have since recovered sharply.
Investors started the week cautiously on concerns over the prospect of European debt contagion and the issues surrounding the raising of the mandatory U.S. debt ceiling. However markets surged overnight as the second bailout package for Greece was approved. Chinese PMI data confirms that their economy is slowing, but the Chinese gross domestic product (GDP) growth is still set to remain above 9% for the rest of this year, on the back of consumer spending and the government investment in infrastructure projects. U.S. stock markets now look set to test their multi-year highs near-term, providing they can resolve their mandated debt-ceiling issues.
Commodity prices have continued to rise as the US dollar struggles, with copper prices still around 10-week highs and the gold price at all-time highs. This has helped support our miners this week, though we saw some profit-taking yesterday after the release of the Chinese PMI data.
The Australian market has set aside concerns over the carbon and mining taxes, and has concentrated on the resolution of the debt issues in Europe and the U.S.
M&A activity also boosted sentiment locally, and there has been plenty of that in the resources sector this week, with BHP Billiton’s $US15 billion bid for U.S. energy firm Petrohawk Energy Corp, which has weighed on Woodside’s share price. Santos announced it will buy Eastern Star Gas for $924 million (or $0.90/share). News Corp. shares fell as the U.K. phone-hacking scandal escalated with the arrest of Rebekah Brooks, but have since recovered sharply. Sundance Resources, the Africa-focused iron ore miner, received a takeover offer from Chinese miner Sichuan Hanlong Group, valuing it at $1.44 billion.
The mining sector has held up quite well this week in response to solid commodity price gains and M&A activity, and the banks are bouncing off their key support levels and are attractive on a yield basis, while retailers remain under pressure.
After last week’s heavy sell-off the ASX 200 has bounced strongly off key support levels around 4450 and looks to be setting up for a run higher near-term as investors look for “risk-on” trades, and we are again testing the resistance offered at the 50 day moving average level. The 200 day moving average level now stands at 4650 and this will be a key level near-term.
U.S. stock markets have had a great week and now look set to test their multi-year highs near-term. Investor optimism blossomed overnight as European leaders made progress on containing their sovereign-debt crisis and the U.S. moves closer to addressing their debt ceiling issues, though there is still no confirmation from Washington on the issue. Traders have pushed stock prices higher on hopes that U.S. negotiations over raising of the debt ceiling will be resolved, as a default would be disastrous for the global financial system.
The U.S. earnings reporting season has proved to be a catalyst, as the markets have risen on the back of stellar earnings from companies like Apple, Google, IBM, JP Morgan and Coca-Cola. Reporting continues next week, but we need a resolution to the U.S. debt ceiling issue as the deadline of August 2nd looms large.
Overnight the Dow Jones closed up 1.2% at 12,724, the S&P 500 index closed up 1.4% at 1,343, the Nasdaq ended up 0.7% at 2,834, and the smaller cap Russell 2000 was up 1.1%.
European stock markets have recovered from losses earlier in the week to surge overnight, as European leaders edged closer to a fresh financing package for Greece and avoiding contagion concerns in other debt-laden members of the euro zone.
The financials have been in focus this week as the European Banking Authority (EBA) report said eight European banks failed stress tests, for a combined capital shortfall of EUR2.5 billion, while another 16 narrowly passed and will likely have to initiate capital raisings to top up their capital reserves. Now that traders have clarity on these issues the banking sector is setting up for a move higher near-term.
Traders are now going in search of “risk-on” assets and equities to add to their portfolios, and banks which had suffered heavy selling of late are recovering and were the big gainers overnight as investors went bargain hunting. The mood in the mining sector was tempered after the release of data that showed Chinese manufacturing activity contracted in July.
Overnight in London the FTSE 100 index was up 0.9% at 5,903, the German DAX was up 0.9% at 7,290, while in France the CAC was up 1.7% at 3,817.
Asian stock markets have been mixed this week, as Chinese manufacturing data weighed on sentiment. Trading remained cautious ahead of an EU financial summit of euro zone leaders in Brussels, but improved as an agreement was reached late in the session between France and Germany on a second bailout package for Greece. Sentiment across the region was overshadowed by data out of China as a preliminary reading showed the HSBC China purchasing managers’ index (PMI) fell to 48.9 in July from 50.1 in June, as a measure below 50 indicates a contraction.
In Japan the Nikkei Stock Index is trading higher for the week, as is the Hang Seng Index in Hong Kong, while in China the Shanghai Composite is trading flat for the week. The Chinese government has managed to slow down industrial growth through its tightening measures, as shown in the PMI data, and this is expected to continue in the months ahead. However the government investment in infrastructure projects should still support gross domestic product (GDP) growth of 9% for the rest of this year, according to a leading HSBC economist.
Overnight in China the SSE Composite was down -1.0% at 2,766, while in Hong Kong the Hang Seng Index was down -0.1% at 21,987 and in Japan the Nikkei 225 Index was up 0.1% at 10,010. The South Korean KOSPI was down -0.5% for the session, while the Indian market was down -0.4%.
The Australian share market has benefited from the positive sentiment from overseas. The S&P/ASX 200 index once again bounced off the key support level around 4450 and is now set to test the 200 day moving average. Closes above this level will be positive for sentiment going forward.
Look for the market to test resistance around 4650, now that the support around the key 4450 level has held for over a month. If the 4650 level is broken then we have a confirmed double bottom and are likely to trade higher near-term.
The U.S. earnings season has proven to be the catalyst we were suggesting for a move higher for the global markets, and the season continues next week. European leaders agreeing to the second bailout package for Greece is also positive, but now we need a resolution in the U.S. to the raising of the mandatory debt ceiling as the August 2nd deadline rapidly approaches.
Our miners should continue to support our market due to the robust commodities prices brought about by the weakening US dollar, gold trading at all-time highs and the M&A activity in the sector. The carbon tax and the mining tax remain as headwinds but they appear to have been set aside, at least in the near-term. Banks are attractive on a yield basis and are bouncing off key support levels, and many blue chip stocks are cheap on a valuation basis, plus fund managers and investors alike are underweight equities.
The S&P/ASX 200 is currently trading at 4590 and is again set to test overhead resistance at 4650 near-term. Key levels for the index next week will be 4700 and 4500.
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By Michael Hevern
Head of Research