The week started with a shaky rally into month-end, but the bears soon stepped in and sold markets off sharply on the first day of June. Investors remain cautious over soft data in the U.S. and now Asia, as well as the spectre of a debt restructure in Greece.
The month-end rally materialised to pare the losses for May, however the rally was short-lived and a sharp sell-off was triggered in the U.S. which had been holding up quite well in comparison to other global markets.
Many markets have been testing key resistance and support levels this week as they trade in a falling channel formation. With the exception of Wednesday night the falls have been measured.
As we suggested last week, there are plenty of headwinds for investors to mull over as the month of June unfolds. All eyes will be on the U.S. monthly unemployment report tonight which is a key indicator of the sustainability of the global economic recovery.
Globally markets continue to be plagued with concerns over the sovereign debt issues in Europe. Asian markets have also been hindered by reports showing Japan is in a recession and Chinese growth is slowing near-term.
Australian Market
The ASX All Ordinaries and the S&P/ASX 200 have experienced sustained selling this week, and no sector was spared. The Aussie market again tested key resistance and support levels and was among those trading in a falling channel formation.
Yesterday investors were pessimistic after data showed GDP fell by -1.2% last quarter, as the economy was hit by a series of natural disasters over last summer, and giving the worst quarterly performance since 1974. This triggered a sharp sell-off where more than $33 billion was wiped from the value of the Australian share market, which fell in line with other global markets affected by renewed concerns about a global economic slowdown.
Among the headwinds confronting investors are the poor GDP figures, the mining tax and the spectre of the carbon tax, all weighing on sentiment.
U.S. Markets
U.S. stock markets look set to close down for a fifth straight week. Another round of soft economic data worried investors and there was also caution ahead of tonight’s Non-Farm jobs report. On Wednesday the U.S. stock markets suffered their biggest declines since August last year, with all three major markets plunging after a series of disappointing economic reports sparked fears the economic recovery is faltering.
The U.S. markets appear to be following the same script as this time last year. Despite the Japanese earthquake disaster throwing a spanner in the works, the other issues that are impacting the markets are similar to that of this time last year.
The jury is out as to whether the Fed will commit to a QE3 in July. Economic data continues to disappoint with the latest reports showing weekly jobless claims exceeding 400,000 for an eighth straight week and consumer spending growth and confidence has been revised down. Moody’s Ratings Agency further dampened the mood after warning that the United States faces a credit review and potentially crippling downgrade if the $US14.3 trillion national debt limit is not raised soon. Moody’s also warned that the credit ratings at Bank of America, Citigroup and Wells Fargo could be downgraded.
Overnight the Dow Jones closed down -0.3% at 12,248, the S&P 500 index closed down -0.1% at 1,313, the Nasdaq ended up 0.2% at 2,773, and the smaller cap Russell 2000 was down -0.1%.
European Markets
European stock markets look set to close lower for a fifth week as sovereign debt concerns escalate. Europe’s main markets had risen earlier in the week on the hopes that debt-laden Greece could get a second international bailout, but investors took flight after research group Markit reported that eurozone manufacturing registered its steepest fall in May since the height of the GFC in 2008.
European stocks have sold-off this week as investors digested the weak economic data from the eurozone, China and the U.S. Investor sentiment was not helped by Moody’s again cutting the rating of Greek government debt. Energy stocks gave back some of their recent gains as crude oil prices for July delivery slipped back below $US100 a barrel.
Overnight in London the FTSE 100 index was down -1.4% at 5,847, the German DAX was down -2.0% at 7,074, while in France the CAC was down -1.9% at 3,890.
Asian Markets
Asian stock markets also look set to close lower for a fifth week due to concerns over a faltering global economic recovery, as many markets have had their biggest string of consecutive losses in two years.
These concerns have raised fears about the future demand for Asian exports. Mid-week PMI manufacturing data across Asia pointed to an easing of activity across the region. This triggered a sell-off across the region, and stocks fell across the board.
News from the U.S. also hurt sentiment, after U.S. ADP jobs data for May fell far short of market expectations, sparking concern about the prospects of the U.S. Non-Farm Employment Report due out tonight.
Overnight in China the SSE Composite was down -1.4% at 2,705, while in Hong Kong the Hang Seng Index closed down -1.6% at 23,254 and in Japan the Nikkei 225 Index was down -1.7% at 9,555. The South Korean KOSPI closed down -0.4%, while the Indian market was down -0.6%.
Our View
The Australian share market has had a sharp sell-off this week, despite the month-end rally. As the week progressed investors shunned risk and pared back their positions.
The S&P/ASX 200 index once again failed to hold above its 200 day moving average, and the recent sell-off has pushed the index towards the lower trading range of its falling channel.
The Aussie market managed a month-end rally, but its was over in the blink of an eye, as we had negative leads from overseas. No sector was spared this week in the sell-off, even commodities prices pulled back. The headwinds remain with a strong Aussie dollar and the proposed carbon and mining resource taxes, and the end-of-financial year clean-out all weighing on sentiment.
The S&P/ASX 200 is currently trading at 4602 and trying to find support at these levels. Key levels for the index next week will be 4700 and 4500.
Those who took heed of our warning last week about buying insurance when you can, not when you have to, should be comfortable with their position near-term.
By Michael Hevern
Head of Research
