Debt Fears Grip Global Markets
Australian shares have traded lower this week after negative leads from key markets in the U.S. and Europe, despite surprisingly good GDP data out of China.
Our markets were hit from a number of sides with the details of the carbon tax revealed last Sunday, Moody’s Ratings Agency downgrading Ireland and putting the U.S. on a negative watch, and disappointing monthly jobs data out of the U.S.
Commodity prices have continued to rise as the U.S. 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.
Australian Market
Australian shares started the week poorly in reaction to negative leads from key markets in the U.S. after a disappointing jobs report, and from Europe, where fears of euro-zone debt contagion have weighed on markets. Investors also had to digest details of the proposed carbon tax, which would see 500 companies taxed from 1 July 2012 starting at $23/tonne of carbon produced and released into the atmosphere. This price will increase by 2.5% per annum and after three years the pricing will be set by an Emissions Trading Scheme.
The mining sector has held up quite well this week in response to solid commodity price gains, while the banks are back at their previous support levels and retailers have been hit hard after David Jones announced an earnings downgrade.
After this week’s heavy sell-off we are again testing key support levels and if these are broken we will likely resume trading in the falling channel which has been in place since mid-April. To put it in perspective this week’s losses have eaten up all of the gains of the previous three weeks.
U.S. Markets
U.S. stock markets have backed off their 2011 highs. Investor sentiment was dented from the start of the week after the disappointing U.S. non-farm jobs data (the U.S. unemployment rate remains stubbornly high at 9.2%) and the ongoing brinkmanship in the debate being held in Washington regarding the $US14.3 trillion debt ceiling and the growing fiscal deficit, scheduled for a vote on August 2.
Overnight, the U.S. government agreed on $US1.5 trillion in spending cuts and will resume negotiations over raising the debt ceiling. The Federal Reserve Chairman Ben Bernanke has moved markets again this week, but has now clarified his comments about a possible third round of quantitative easing (QE3), saying that the Fed is unlikely to act on any easing in the near-term.
The warning of a possible debt-downgrade for the United States had fuelled fears of higher borrowing costs and cast a shadow over the markets. Investors have chosen caution after Moody’s Rating Agency announced a review of the U.S. AAA credit ratings for a possible downgrade, which has seen financial stocks and some exporters sell-down.
There is some M&A activity in the U.S. with ArcelorMittal and Peabody Energy launching a $US5.0 billion takeover bid for Australian’s coal miner Macarthur Coal, at $15.50/share which is only slightly higher than the previous bid of $15.00/share. Also, BHP Billiton has entered into a definitive agreement to acquire Petrohawk Energy Corporation for a total equity value of approximately $US12.1 billion and a total enterprise value of approximately $US15.1 billion, including the assumption of net debt. The earnings season has begun on a positive note with JP Morgan and Google.
Overnight, the Dow Jones closed down -0.4% at 12,437, the S&P 500 index closed down -0.7% at 1,309, the Nasdaq ended down -1.2% at 2,763, and the smaller cap Russell 2000 was up 0.9%.
European Markets
European equity markets have fallen this week, backing of their 2011 highs due to continuing worries over sovereign debt contagion. A downgrade of the Irish sovereign debt rating to junk status by ratings firm Moody’s Investors Service has cast a cloud across Europe with Ireland now joining Greece and Portugal as debt crisis basket cases. European bank stocks continued to weigh throughout the week, especially those with exposure to the sovereign debt of Italy and peripheral European PIIGS nations. The Italian economy is in a debt mire and overnight the government’s borrowing costs surged in a bond auction, rekindling worries about the spread of the euro-zone debt crisis. The Italian government successfully sold nearly EUR5 billion of long-term bonds, but its borrowing costs rose sharply, while the Senate approved a EUR40 billion austerity package, which will now go to the lower house of parliament for a vote.
The next key data out of Europe will come from the European Banking Authority which will release the results of the stress tests for 91 banks as part of an effort to reassure investors that the region’s banks have sufficient capital. The publication will be released this weekend and will include information on capital levels, estimates for profitability in 2011 and 2012 as well as the size and maturity of their holdings of sovereign debt, the EBA said this month. Analysts are concerned however that there was an unwillingness to test for a Greek default in the scenarios.
Overnight in London the FTSE 100 index was down -0.9% at 5,852, the German DAX was down -0.7% at 7,215, while in France the CAC was down -1.1% at 3,741.
Asian Markets
Asian stock markets continued to fall this week as investors focused on the debt issues in Europe and the U.S. The Chinese market bucked the trend after the announcement of robust GDP data boosted investor sentiment. Data showed the second-quarter gross domestic product rose 9.5% year on year, and industrial production in June was up 15.1%, beating forecasts and easing fears that the Chinese economy may be heading for a hard landing. This is another reason Aussie miners have supported our market.
The Japanese market is again trading below the 10,000 level and the Hong Kong market has been sold off heavily this week and is again testing recent key support.
Overnight in China the SSE Composite was up 0.5% at 2,810, while in Hong Kong the Hang Seng Index was up 0.1% at 21,940 and in Japan the Nikkei 225 Index was down -0.3% at 9,936. The South Korean KOSPI was flat for the session, while the Indian market was up 0.1%.
Our View
The Australian share market has suffered from the negative sentiment from overseas. The S&P/ASX 200 index rejected the key resistance level around 4650 and has remained below its 50 day moving average, which are negative signs going forward.
Look for the market to continue seeking support around the 4450 level which it has held for the past month. If this level is broken, then we will likely resume trading in the falling channel which has been in place since mid-April and 4250 will be the next target.
The U.S. earnings season continues next week but the debt crises in the U.S. and Europe are dominating sentiment near-term. If the fears over debt subside, then earnings could be the catalyst for a move higher, as many of the analyst earnings forecasts have been ratcheted down because of the soft June economic data showing slowing economic growth.
Our miners continue to support our market due to the robust commodities prices which have occured because of the weakening US dollar. The carbon tax and mining tax remain as headwinds. Banks are attractive on a yield basis but they have broken monthly 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 4480 and has broken above short-term resistance. Key levels for the index next week will be 4550 and 4400.
By Michael Hevern
Head of Research
