Markets Back at Post-GFC Highs
Investors continued to shrug off bad news this week, and with a focus on corporate earnings pushed markets higher to around post-GFC highs.
Reports that the Standard & Poor’s ratings agency cut its outlook on US government debt prompted investors to head for the exits, but once again fund managers turned the markets around as they went bargain hunting after the short sharp sell-off.
Commodities prices were again in focus as they approached record levels. The US dollar’s decline has pushed the US currency to near its lowest levels since before the financial crisis of 2008 against a trade-weighted basket of its rivals. Gold futures extended their record-breaking rally, settling just below the $US1,500 level as investors chose to lock in profits. Crude oil prices rose for a second straight session after the Department of Energy said US oil supplies unexpectedly fell last week, while gasoline supplies tumbled more than expected as oil futures rose above $US111 a barrel. Copper prices closed sharply higher, supported by strong equities and a weaker US dollar, with further gains expected in coming days with traders predicted to cover short positions ahead of a string of public holidays.
Investors need to exercise caution ahead of the Easter break and at the very least take some profits or take out protection through options. The forthcoming Easter holiday period and Anzac Day means that there are only four trading days left for April.
The ASX All Ordinaries and the S&P/ASX 200 are again back at their 12 month highs and are searching for some catalyst to push through these levels. Mining and energy stocks have driven the index this week with commodities back near record levels. The US dollar has continued to sell off and the Aussie dollar remains at record levels of post-float highs around $US1.07. Expect to see some profit-taking today ahead of the Easter weekend.
US stock markets have been volatile this week but are finishing higher due to investors focusing again on improving corporate earnings, particularly in the technology sector.
Investors were rattled at the beginning of the week with the markets suffering their biggest falls in a month. Investors headed for the exits after Standard & Poor’s cut its outlook on US government debt from stable to negative, to account for budget deficits and the rising government indebtedness. The ratings agency said it believes there is a “material risk that US policy makers might not reach an agreement on how to address medium and long-term budgetary challenges by 2013″. However, improving corporate earnings continue to support stock prices, and traders saw the sharp sell-off as a chance to buy on the dips once again, as they look to add risk to their portfolios with commodities prices continuing to surge.
Overnight the Dow closed up 1.5% at 12,454, the S&P 500 index closed up 1.4% at 1,330 and the tech-heavy Nasdaq ended up 2.1% at 2,802.
European markets are finishing higher this week, after a nervous start. Early in the week, investors reacted nervously to Moody’s Investors Service downgrading Ireland’s foreign- and local-currency government bond ratings by two notches to junk status, and comments from Germany that Greece might have to restructure its debt, stoking fresh fears over the eurozone. This put the PIIGS economies in focus again as the Greek money market rates jumped sharply.
As the week unfolded, European markets took their lead from US corporate earnings as stock prices pushed higher. Economic data showed the German economy is now expected to grow 2.6% this year and 1.8% in 2012, while inflation is set to remain low at 2.4% and fall to 1.9% in 2012, according to government forecasts. The German market dominates Europe and looks set to remain robust, which is essential for the European economies’ recovery to remain on track.
Overnight in London the FTSE 100 index closed up 2.1% at 6,022, the German DAX was up 3.0% at 7,249, while in France the CAC was up 2.4% at 4,023.
Asian markets are trading higher this week and China and Japan have been the main focus. Japan continues to address the problems at the Fukushima nuclear power plant, while China has reacted to higher-than-expected inflation figures with the central bank raising the reserve requirement by 0.5 of a percentage point to drain more money from the banking system. This is the fourth such increase this year.
All the major markets traded higher with Japan, China and Hong Kong all rising as traders looked to add risk to their portfolios. Miners rose as commodities prices rebounded, while technology stocks rose sharply after Intel and IBM reported better-than-expected earnings and positive 2Q guidance lifted the regional technology sector.
Yesterday in China the SSE Composite closed up 0.3% at 3,007, while in Hong Kong the Hang Seng Index was up 1.6% at 23,890 and in Japan the Nikkei 225 Index was up 1.8% at 9,607. The South Korean Kospi rose 2.2%, and Indian shares also rose 1.8%.
The S&P/ASX 200 index looks set to hold on to its gains into next week as the post-GFC highs are tested. It’s currently trading at 4888, having backed off the 5,000 level. Key levels for next week will be 4750 to 5000. The focus near-term will continue to be on end-of-month, US earnings reports, the Aussie dollar and commodities prices, particularly gold and crude oil.
Investors should use protection through options to hedge their long positions near-term.
By Michael Hevern
Head of Research