30/08/10 - 09:00
Ben Potter, Research Analyst
Overnight Market Report - 9.00am
US markets put in a good session to close the week out on Friday as Federal Reserve Chairman Ben Bernanke eased market concerns by saying the Fed was willing to do whatever it takes to stabilise the recovery.
A better-than-expected reading on Q2 GDP also had the markets in a good mood. The Dow Jones Industrial Average, S&P 500 and NASDAQ all finished the session 1.7% higher.
Locally, the ASX 200 is called to open 1.1% firmer at 4417 following the solid US leads.
We’re likely to see strong support for material names after the basic materials sector in the US was the top performer, rising 3%. Leads from the London Metals Exchange were encouraging too, with all base metals up more than 1%. In normal London trade, Rio Tinto and BHP Billiton were mixed, adding 1.5% and declining 0.3%. Surprisingly, the BHP’s ADR is only calling the locally-listed stock up 0.1%. However, it may open firmer than this.
Elsewhere, we should see good buying interest across a number of sectors including the energy, financial and industrial spaces. Their corresponding sectors in the US were all up more than 2%.
In summary, it looks like being a positive start to the new week, with stocks expected to be higher across the board. With the earnings season largely behind us, the market will once again focus more on Asian trade as the session matures.
Week in review - S&P 500
A smaller-than-expected downwards revision to Q2 GDP and some reassuring comments from Ben Bernanke that the Fed stood ready to do whatever it takes to stabilise the economy, saw the S&P 500 end the week on a positive note. However, it was still 0.7% lower on the week.
Having been down heavily mid week, it was positive to see the S&P convincingly bouncing off the important technical support level of 1040. The general feeling was that the market had been oversold with the late-week strength being a combination of traders covering their short positions and bargain hunters moving into beaten up blue chip names.
It was always going to be a matter of at what level were current valuations too hard to ignore. With the S&P 500 currently trading on a PE of 12.8x forward earnings, the market is close to its cheapest levels since March 2009. Investors who can see through the current haze are likely to find themselves very well positioned for the longer term, particularly with future equity returns likely to be significantly higher than the current returns on offer from cash and treasuries.
In relation to the economy, there seems to be a growing acknowledgement that President Obama’s policies and stimulus packages have failed to gather traction in the most sensitive areas, being the housing and jobs markets. Hence, the Fed is increasingly being looked at as the economy’s and the market’s potential saviour.
With the Fed standing ready to act, there are some noteworthy positives that could propel the S&P meaningfully higher by the end of the year. The recent pickup in M&A activity and the excellent quarterly earnings season would normally be catalysts for equities to surge, however this will not happen until a stabilisation in the macroeconomic environment becomes evident. As we know, talk is cheap, so expect the market to demand decisive action from the Fed in the coming weeks.
Week in review - ASX 200
The ASX 200 finished the week 1.4% lower due to a combination of concerns about the outlook for the global economy and uncertainty stemming from who will form the nation’s next government.
As Australia went to the polls, it was widely believed that the mining tax would have become a reality by now. How things change! A hung parliament has thrown this into disarray. Should the Coalition form a minority government, the abolition of Labor’s proposed mining tax will undoubtedly have positive implications for the nation’s miners, as well as for the broader equity market. We would also expect to the see the AUD well supported under this scenario as foreign investment is more likely to be attracted under a more pro-business government.
With doubts though as to whom the independents will back, it is too premature for these themes to play out, leaving the local market susceptible to global leads. This resulted in the heavyweight materials and financial sectors closing the week lower by 1.7% and 1.5% respectively.
On top of political uncertainty, concerns about the global recovery have seen Australian CEOs issue unanimously cautious outlooks. It’s given investors further reason to not rush into equities. There is certainly a school of thought – why rush into equities when banks looking to boost deposits are offering a risk-free 7% return?
With it likely to be a number of days until an election outcome is determined, the ASX 200 is likely to tread water, merely following offshore leads.
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