The year to date for equity markets has been a rollercoaster. The first two months saw advances of 5%-7% for most of the major indices. These gains had been predicated on seasonal strength, strong US corporate earnings and a synchronised improvement in global economic data.
With the global outlook on the improve, the Japanese earthquake, tsunami and nuclear fallout essentially caught the market off guard, with equities reversing the entire year's gains to fall into negative territory. While markets recouped these losses relatively quickly, doubts had begun to surface on how the US economy might handle the ending of QE2 at the end of June.
These concerns coincided with the beginning of a soft patch in global economic data which has rocked equity markets since the start of May. Traders now seem evenly divided as to whether this is just a soft patch, or the beginning of something deeper and more long lasting. No one knows the answer; it is something that will only become evident in hindsight.
Potential market moves over the coming weeks
So the big question is, where to from here? Firstly, we believe the local market is likely to be pulled along by offshore leads and global macro issues rather than meaningful improvements in the domestic economy. The main drivers causing our relative underperformance include foreign perceptions of our government and perceived political uncertainty, the possibility for further RBA tightening, plus the high AUD. These factors are unlikely to change much over the next month or two.
On a global scale
However, this does not mean the ASX 200 is going nowhere. Any lift or further sell-off in worldwide trade would likely drag the local index along for the ride. Global markets have had a pretty reasonable pullback over the last six to eight weeks, with most falling in the range of 6% - 10%. Given the seasonal softness, we feel the most likely scenario from here is that they will begin to stabilise and move into a sideways trading pattern over the coming months. This may occur as fears over the European debt crisis begin to quieten and participants come to the realisation that the global economy is merely undergoing a soft patch in a larger recovery.
Is there any honey left for the bears?
However, there is also the possibility that markets have become too bearish in their expectations recently, and that economic data will stage a bit of a 'snap back'. Another positive catalyst may be the upcoming US Q2 earnings season. Analysts still remain reasonably upbeat ahead of this, and there have not been too many confessionals yet (although the next two weeks will confirm this). Ahead of earnings, it is always about expectations; given most stocks have undergone reasonable corrections over recent months, we could see a situation where they are priced too bearishly and Q2 earnings reports actually surprise to the upside. It would not catch us unawares at all if this sort of scenario played out; it frequently does.
Have a view? Why not take a CFD position?
With volatility likely to continue, everyone is watching the Japanese earthquake low of 4477. We'll either see a bounce from this figure or a move lower towards the 4200 support level. Take advantage of your view of the Australian market with a stock index CFD. Go long or short on the Australia 200, from just a one point spread. We also offer an array of risk management tools to support your trading.
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Updated: 16/06/11
Disclaimer: The above material does not contain (and should not be construed as containing) personal financial or investment advice or other recommendations. The information provided does not take into account your particular investment objectives, financial situation or investment needs. You should assess whether the information provided is appropriate to your particular investment objectives, financial situation and investment needs. You should do this before making an investment decision based on the material above. You can either make this assessment yourself or seek the assistance of an independent financial advisor. IG Markets Limited accepts no responsibility for any use that may be made of these comments and for any consequences that result.
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