Markets started the week on a positive note, after leaders at the EU summit promised to act to address the eurozone debt crisis.
As the week progressed the focus shifted to the European Central Bank (ECB) as investors waited for interest rate cuts to complement the measures taken by EU leaders to shore up banks and bring down borrowing costs for Spain and Italy, and looked for news that there will be additional monetary stimulus. The next question is whether the ESM/EFSF will have enough capital to fund the promises made at the summit.
US traders had a shortened week and returned from the Independence Day holiday in a sombre mood. US stock markets declined overnight, ending their biggest 3-session rally for the year. Traders were disappointed by the European efforts to address the worsening eurozone debt crisis and they showed caution ahead of the US monthly employment report.
And there are reasons for this caution. If we look back at the last US monthly jobs report US stocks sold-off sharply, down -10%, erasing all of the 2012 gains. Now the S&P500 has rallied 7% from its recent lows due to speculation that there would be a coordinated global central bank action. The action that traders need to see is QE3 (quantitative easing) in the US and LTRO2 (longer-term refinancing operation) in the EU, and the interest rate cuts which are already factored into the markets. The Federal Reserve is concerned that growth is still not strong enough to reduce unemployment.
European stock markets ended lower overnight as traders had already factored in the ECB move on interest rates, however the Stoxx Europe 600 index is still on track for its fifth week of gains. The ECB lowered its benchmark lending rate to 0.75%, as expected, and the Bank of England kept its key rate unchanged, but increased stimulus measures by boosting the size of its bond-buying program by another 50 billion pounds. Meanwhile the Chinese central bank has lowered interest rates for the second time in a month. This coordinated global central bank action heightened concerns that the global recession is deepening. The ECB President Mario Draghi warned that risks to the economic outlook remain tilted to the downside.
Traders expressed disappointment that the ECB stopped short of signaling additional stimulus on top of rate cuts as the flagging eurozone economic growth needs more of a jump start (LTRO2?). The debt markets in Spain and Italy saw borrowing costs spike higher overnight. Across the region the financials led the declines, but energy stocks also sold-off on the back of lower crude-oil prices. Miners and auto stocks provided some support.
Asian stocks markets have found some support this week after the EU summit, but as the week progressed profit-takers have stepped in. The Chinese market continues to underperform, due to concerns about their weakening economy, while the Hong Kong market ended higher after a choppy trading session. The selling in China came after reports of dismal growth in June lending figures for the top four banks. Overnight the Chinese central bank lowered interest rates for the second time in a month, in a reaction to its slowing economy.
In commodities crude-oil prices have bounced 11% in the past week and are now above $US86, as inventories backed off their 22-year highs. Gold prices also jumped after the EU summit, and are up above $US1,600 again. In this week’s Analysts’ Eye we investigate the interrelationship between crude-oil and the equities markets and how you can use this relationship to forecast equities prices.
The Australian market has drifted higher this week, and is tentatively holding around the key resistance 4180 level. Sentiment has been mixed, driven by news from the eurozone and hopes of central bank easing. Major market sectors have been tentatively holding on to the support levels of last week.
As expected, the RBA left interest rates on hold this week, saying “as a result of the sequence of earlier decisions, there has been a material easing in monetary policy over the past six months” and the Board has judged that, “with inflation expected to be consistent with the target and growth close to trend, but with a more subdued international outlook than was the case a few months ago, the stance of monetary policy remained appropriate”.
In our market the defensive sectors continue to outperform, with Telstra, Real Estate REITs and health-care stocks holding ground, as investors seek out stocks that can deliver consistent yield in this low rate environment. The materials and energy sectors saw some buying early in the week, but continue to underperform. The industrials sector is trying to hold on to support, while banks have found support as investors turn to dividend yield. David Jones is facing questions over the unsolicited bid it has received last week.
On the S&P/ASX 200 the 4120 level has been broken and the index is looking to close at a 5-week high. The 4200 level is the next crucial resistance level and 4120 is a pivotal level for next week. The next few sessions will determine whether we slip back into the trading range which has prevailed for the past two months.
Investors should have protection in place for their capital, and could look to reduce their risk by using options and warrants strategies. The ASX market has bounced 4% from its recent lows and is susceptible to some profit-taking at these levels. Look to pick up value stocks that pay consistently high dividend yields, when they reach your buy levels.
Remain attuned to the news from overseas, particularly from the eurozone, China and the US, as the US releases its monthly non-farms employment report tonight. 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 4150 and is testing breakeven levels for the year. Key levels for the index next week will be 4050 and 4200, with 4120 the key short term pivot level.
By Michael Hevern
D2MX 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 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.
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