30/07/10 - 15:00
Ben Potter, Research Analyst
Market Update from the Trading Room - 3.00pm
Asian markets are trading lower today with weak leads coming from the US and worse than expected Japanese economic figures.
With the Yen also strengthening overnight, most notably against the US dollar and the British pound, the Nikkei is trading lower by 1.8%. The Kospi is weaker by 1.0%, while the Hang Seng appears to be trading just off the lows of the day, falling 0.5%. The Shanghai composite is seeing profit taking after a strong week and has currently retreated 1.1%.
The Australian market has reacted negatively to the US lead and weakness in Asia with the ASX 200 currently down 0.7% at 4494.
It seems global markets are on the precipice of a big move in either direction. Right now there seems to be enough information out there to entice both the bulls and the bears and that is why the Australian market is failing to break convincingly above 4500. Next week will be key and there should be a pickup in volatility given we have the ISM manufacturing and services figures out, which are considered to be leading indicators. Additionally we have the all important Non-Farm job numbers due out with analysts calling for 110,000 private sector jobs created.
Domestic traders don’t have to look far for key economic releases and tonight’s GDP print in the US will be heavy scrutinised. At present economists are calling for a slowdown in the growth rate from 2.7% to 2.6%, although given the poor data releases of late, a below expectations result cannot be overlooked. Whilst GDP is a backwards looking indicator, it seems to be getting more credence this time around as the inventory build up has pulled back and US growth is now so critical for the risk trade. A stronger than expected number would be good for equities but it is hard to understand how the US$ will trade. Will we see a stronger US$ or will it weaken against the Euro and Australian dollar as risk comes into the market? The best way to measure sentiment is the USD/ YEN cross to get an understanding of trader’s reaction, with dollar strength meaning the GDP print was taken positively.
The Chinese PMI data due out on Sunday will be critical to maintain the rally we have seen in commodity prices, with copper now at 12-week highs. Sentiment has shifted recently to a feeling that the Chinese have done enough to curb inflationary pressures, whilst having the firepower to stimulate the economy if it slows down too much; this has helped the likes of BHP to trade above $40.
Although analysts expect the PMI data to slow this month to 51.4, a reading below 50 (showing contraction in manufacturing) would be highly negative for the risk rally we have seen in commodity-based stocks and currencies and a sell off would ensue.
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