Weekly Market Wrap
Traders’ continued selling this week, as markets plunged from their recent record highs. Traders in Europe and the US have joined in on the selling, as those markets have given back all the gains of the past five weeks and are again finishing at the low end of their ranges for the week. In Asia the markets have finished lower for the past four weeks. The Chinese market is also finishing lower after bucking the trend in Asia in the past month, finishing higher for five of the past six weeks.
US stock markets are tracking to end the week around their lows. The three benchmark indexes are all down for a third week. The Dow Jones is hovering around the 15,000 level, while the S&P 500 has held around 1600. Markets are testing their 50-day moving averages for support, as the “buy-on-the-dip” mentality is being tested. Traders have hit the sell button this week, on concerns that the US Federal Reserve may start to “taper” its QE stimulus as early as September. Economic news has been mixed, with ISM data renewing concern that economic growth could slow. The report from the Institute for Supply Management showed manufacturing unexpectedly contracted in May at the fastest pace in four years, decreasing to 49 (down from 50.7 in April).
Traders also reacted negatively to other mixed economic data, as a report from the ADP Research Institute showed US companies hired fewer workers in May than projected, in reaction to federal budget cuts and higher taxes, while the Commerce Department showed US factory orders in April fell short of estimates. The Fed’s Beige Book, a survey of the 12 Fed regions, showed the economy expanded at a “modest to moderate” pace in all but one of the central bank districts, with broad-based gains ranging from business services to construction and manufacturing. Investors are keenly awaiting the Non-Farm Payrolls monthly employment report due out Friday, which will give some further insight into the strength of the US economy. Economists are forecasting a slowing in growth in payrolls in May and this will dominate sentiment for next week.
European stocks markets hit fresh 6-week lows this week. The Europe Stoxx 600 was weaker, as trading volumes picked up and the index pared its gains to 4% for the year. In London markets fell to 6-week lows, as the miners weighed on sentiment, while retailers also slumped. In Germany the market has confirmed a breakdown from a recent double-top formation, despite surprising German unemployment figures for May, which rose four times more than economists estimated as the eurozone’s sovereign debt crisis and a long winter impacted Europe’s largest economy. European traders showed concern about comments from Deutsche Bank that indicated the US central bank’s policy makers will start “tapering” quantitative easing as early as September. Traders were also disappointed as the ECB left additional stimulus measures “on the shelf” and kept rates on hold, with ECB President Draghi predicting that the eurozone will return to growth by the end of the year.
Asian stock markets have fallen sharply this week, and the Japanese market continued its sell-off. The MSCI Asia Pacific Index has plunged down -9.5% from its May peak and is heading for its lowest close since early February. The Chinese and Hong Kong markets have traded lower. Investors will have to digest the Chinese trade balance and CPI figures over the weekend after getting mixed signals from recent Chinese data with the HSBC Holdings Plc and Markit Economics reporting their Flash PMI index of manufacturing in the world’s second-largest economy fell to 49.2 in May from 50.4 in April, while last weekend an official index for the industry rose to 50.8 (up from 50.6).
Japanese stocks fell further this week, falling below 13,000 points for the first time since early April, as the Nikkei is now down nearly -20% from its recent multiyear peak in May. The recent selling was triggered after Prime Minister Shinzo Abe failed to impress investors in a speech outlining Japan’s growth strategy in the so-called “Third Arrow” of economic revitalisation, which included a legislative campaign to loosen rules on businesses ranging from non-prescription drugs to construction.
In today’s Analyst’s Eye we review a trading strategy we recommended back at the start of May that could have been used to protect your position(s) in high-yield stocks. The trade has gone to plan and we discuss how you would now manage this trade protection here.
The month of May has ended lower for the past four consecutive years, including in the Asian markets. The selling in the Aussie market has continued into the start of June, with stocks across the board suffering ever since the RBA surprised the market by cutting interest rates back in early May. The ASX market and Aussie dollar have recently been hit by concerns over slowing growth in China, concerns over the US Federal Reserve tapering its stimulus this year, and volatility in Japanese equities.
Overseas investors continue to leave the Aussie market and our dollar continued its implosion to below US94.35c this week, a level not seen since October 2011. The selling was broad-based, with most sectors selling-down a further -3.5% this week. The defensive sectors were the worst hit, while the materials sector was helped by the falling Aussie dollar and the short-term improvement in the iron ore and gold prices which held around the $US1,400 level again, but still finished in the red.
The market now has key short-term resistance around the 4900 level and is testing 4800, which will be key for next week. The ASX 200 and All Ords have recently given back nearly all their gains for the year and are yet to find support. The ASX 200 market has crashed through the 4900 level. The main drivers for the local market have been the continued weakness in the Aussie dollar, resulting in the implosion of the yield trade and also the confirmation of the below-forecast growth in the economy, after the ABS reported disappointing GDP figures, with even Western Australia falling into recession. The Aussie economy grew 0.6 percent last quarter from the previous three months, below the forecast 0.7 percent. The RBA has kept its cash rate at a record low of 2.75 percent as expected, but kept an easing bias and the ABS reported the balance of payments figures were slightly below expectations.
Key levels for the ASX 200 index next week will be 4730 and 4900, with 4820 the key near-term pivot level. Volatility has jumped sharply this week, so that protection you have in place for your portfolio should be paying off. The 13-day moving average level will be key resistance going into June. The market is currently testing its 200-day moving average for near-term support.
Investors should be reviewing their insurance (see the Analyst’s Eye today) and could look to put their money to work, while reducing their risk by using options and warrants strategies. Remain attuned to the news from overseas, particularly from the eurozone (growth), China (PPI data) and the US (stimulus ON/OFF/tapered). Monitor the US dollar for a guide to the future direction of commodities and equities prices.
Contact me at D2MX Advisory on 1300 610 024 and we can help you trade using a number of strategies that will give you the tools to navigate this market and help you improve your returns on investment.
Investment Adviser D2MX Advisory
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.
Disclaimer: Using leverage to invest can be a two edged sword, as it can magnify your returns when the stock price rises, but will in turn magnify the losses if the trade does not perform as expected.