26/07/10 - 09:00
Ben Potter, Research Analyst
Overnight Market Report - 9.00am
The Australian market looks set to follow the US lead today with the ASX 200 called to test 4500 on open. Following on from the strong momentum in the market on Friday, gains should be broad based, although we could see cyclical and risk-associated stocks outperforming.
The US market on Friday traded cautiously until the European bank stress test came out. However, buying again resumed once traders had made up their mind that the results were reasonably positive. As a result, the S&P shot up from 1090 half way through the session to close at 1102, a gain of 0.8%.
It took a while for traders to warm to the EU stress tests which ultimately found that 7 of the 91 banks need additional capital. The results showed banks needed to raise 3.5b Euros, which is well below the shortfall of 30-90b Euros the market had forecasted. Whilst we saw the Euro head higher after initial weakness and a gain in US treasury yields, some market participants saw the tests as nothing short of a PR exercise, saying they simply were not stressful enough. What matters though is that the biggest and most talked about risk event is out the way, and the Australian market looks set to open higher today.
Looking at the S&P sectors, we saw good gains in the industrial and material space. BHP looks set to open just above $40, with the ADR pointing to a 0.8% gain. Rio Tinto also fared well with a 2.6% gain on its US listing.
Banks look set to be supported as well with the S&P financial sector closing up 0.8%.
The highlight of the week will no doubt be the eagerly awaited CPI print on Wednesday (see The Week Ahead calendar). The RBA recently flagged in its minutes that the European stress tests and the CPI print would be key in determining whether they looked to raise rates by 25 basis points in August. As it stands, economists are looking for 1% growth on the year and 3.4% for the second quarter. If the number is hotter than forecasted, expect the Australian dollar to perhaps gravitate to above 90c. Given the market is only pricing in a 26% chance of a move in August by the central bank, the CPI could see some volatility in the currency this week.
Week in review - ASX 200
The Australian market whilst following the US leads underperformed with a 0.8% gain, closing up for the third week a row. It is looking like a positive July with the bourse up 3.6%, also rallying 6.5% from its low of 4182 on 6 July.
Technically the ASX 200 looks like it could go on to test 4638. On the daily charts, there are some interesting time and price symmetries on the down and up swings. If that symmetry is to be followed, we could see rallies in the next five trading sessions. However, if the index does move above 4600, it will start looking overbought and the bears may gain the upper hand.
Whilst the US is in the midst of earnings season, there is plenty for the Australian investors to focus on as well. Resource stocks seem to be getting some serious buying interest, and a pick up in the Shanghai composite have traders wondering if the negative sentiment around China could be overdone. There has been increased M&A activity here as well and this should continue as prices are still low and corporations have increased cash levels on their balance sheet.
The upcoming election will also grab investors focus. Whilst policies such as the minerals rent tax will continue to be debated, it is worth noting that the ASX 200 and the Australian dollar tend to post modest gains with an average of around 1% prior and post an election. The Australian reporting session also kicks off in August, and this could see mountains of cash fund managers have amassed deployed in equities.
Week in review - S&P 500
Last week saw the bulls dominate trade with the S&P gaining 3.5% at 1102. It’s the first time in one month that it has managed to close above 1100. Interestingly the Russell 2000 (the small cap index) rallied 6.5% - outperformance of small caps is thematic of risk taking.
Price action on the S&P indicates that the index could push higher in the short term. The weekly chart started on its low and closed on its high, which is always a good sign. However, what is important is that some of the strong support levels held last week. Looking at the S&P futures, which helped drive the cash index, it rallied from 1051, a double Fibonacci support. Big buy orders in the market were triggered mid-week when it hit this level, helping the market to close above 1100, a level it has failed to hold recently.
A recent break of the downtrend channel from 26 April should see momentum take us higher, and it also looks like we have a trend developing for the first time in a while. Whilst some early or smart money has been deployed, a more bullish development would be to see the S&P back above its 200-day moving average at 1113, a level that the bulls like to trade above. Interestingly on Friday, the Dow Jones managed to break and hold its 200-day moving average at 10395.
Whilst price action may be looking rosier, fundamentals on the other hand remain mixed, with the Fed still subdued on the US economy. Ben Bernanke is relatively pessimistic and is torn between improving corporate profitability (we have seen 59% aggregate EPS growth and 10% revenue growth from the 149 US corporations who have reported) and anaemic job creation. The upcoming economic releases this week are expected to be weak, so it will be interesting if the S&P can hold 1100.
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