23/08/10 - 09:00
Ben Potter, Research Analyst
Overnight Market Report - 9.00am
On Wall St on Friday, concerns over the economic recovery weighed on the market early, although the major indices did manage to finish the session significantly off the lows.
For the session, the technology laden NASDAQ was the top performer, rising 1 point to 2180. On the downside, the S&P 500 fell 0.4% while the Dow Jones Industrial Average lost 0.6%.
Ahead of the open, the ASX 200 is called to open 25 points lower at 4405 following the weaker overseas leads as well as the uncertainty stemming from the election result.
In terms of sectors, the only big mover in US trade was the energy sector, closing the session 1.2% following another fall in Crude Oil price, which lost 1%. This could see some of the local energy plays coming under pressure.
Elsewhere, the material, financial and industrial sectors were all down between 0.3% and 0.5% and are likely to weigh modestly. Base metal leads from the London Metals Exchange were mixed while in normal London trade, Rio Tinto fell 0.2% while BHP Billiton managed to add 0.6%. BHP Billiton’s ADR is calling the locally listed stock 0.2% higher at the open.
Obviously the big talking point is the hung parliament, the first one in 70 years. With it comes great uncertainty, which is the markets worst enemy. There’s no doubt the weekend’s result will add to investor nervousness in the short-term, and possibly longer, depending on how the government ends up being formed. Worries about less decisive policy making and concerns over less friendly business stance from the Greens, who were the big winner on Saturday, are likely to be some of the major issues.
A lot of cash was sidelined ahead of election and this result certainly isn’t likely to trigger a quick re-entry. The perception of heightened political risk from offshore investors is likely to remain too.
In summary, the combination of weaker offshore leads and political concerns should see the local market broadly weaker today.
Week in review - ASX 200
The Australian market retreated further last week, with the ASX 200 index losing 0.6% to finish at 4430.9, adding to previous week’s fall of 2.3%. The macro backdrop remains the major concern, with weak US economic data late in the week heightening concerns that its economy may be facing more than just a soft patch within its recovery.
From a technical perspective, the weekly chart shows that last week’s trading range contracted by more than 50%. In candlestick terms, the ‘doji’ pattern that formed, where the opening and closing price are very similar, indicates indecision within the market. Neither the bulls nor bears are in control. From a bullish perspective, it’s encouraging to see the market holding above the 50% Fibonacci retracement level (May low to August high) of 4389, where there seems to be some buying support.
BHP’s bid for Potash Corp and the ongoing election campaign dominated the headlines. BHP was a major drag on the local market, finishing the week 6.2% lower. Obviously there are some concerns as to how it will fund the deal, as well as implications for its balance sheet and ongoing financial flexibility. Having said that, the fact that BHP has been willing to make such a move is a big positive in our opinion, and investors should take comfort in the miner’s noted financial discipline.
There’s no way BHP would jeopardise its financial strength and flexibility if it didn’t see massive upside potential in the transaction. Many market pundits have been looking for the next catalysts – perhaps this move from BHP will be the trigger for a raft of M&A activity over the remainder of the year. Many corporates have been sitting on large hoard of cash, earning very little return, and may feel better returns can be generated through corporate activity.
Pre-election nerves also seemed to drag on the 200 index. With Friday’s opinion polls showing it was going to be a neck-and-neck race, concerns grew over the potential for a hung parliament, which would create another level of uncertainty for the market.
Whoever wins, a degree of an uncertainty will have been removed from markets, which may be enough for fresh capital to be invested. Either way, less uncertainty is always a good thing in the eye of the market.
Week in review - S&P 500
On Wall St, US indices lost ground for the second straight week on light summer volumes as investor sentiment was hampered further by weak economic data. The broad-based S&P 500 index finished the week 0.7% lower to close at 1071.69. The Dow Jones Industrial Average fell 0.9% while the NASDAQ managed to buck the trend, adding 0.3%.
Looking at the weekly chart, the price action printed a lower low and lower high, reversing the short-term uptrend. The fact that there was only eight points difference between the week’s open and close indicates indecision, with the bulls not giving up without a fight. Looking at the bigger picture, the long-term chart shows the development of a bearish head and shoulders pattern. It has yet to be completed but it is certainly worth watching.
As has been the case recently, the big concern remains the macro economic backdrop. The conundrum many continue to grapple with is whether or not this recent US slowdown is the beginning of another recession or a soft spot in a longer-term recovery. We feel it is simply a soft patch which will work its way through the system in time.
Having said that, expectations are for equity markets to remain fairly quiet, at least until after the Labour Day holiday on September 6, which typically heralds the return of many professionals and hence more normal trading volumes.
Looking ahead, there will be plenty of economic releases for those that aren’t on holiday to hang their hats on. The highlight for the week will be Ben Bernanke’s speech on the economy on Friday, which will be closely watched by markets. We’ll also see reports on housing data, durable goods, jobless claims and a revised look at second quarter GDP, which will provide grist for the debate about how much the economy is slowing.
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