Australian Market Weekly Wrap

 

Equities are in retreat but a full-blown 2010 style risk off meltdown is as yet a threat not a reality. The ASX has comprehensively broken the support we talked about in last week’s wrap and the global bond rally tells us that the market is starting to bet with the data as they recalibrate earnings potential.

I have posted my in-depth Weekly Aussie Dollar Wrap over a MacroBusiness earlier this morning you can find it here . Essentially it looks to me that the Aussie has no choice but re-test 1.0440/50 at a minimum with a growing chance of 1.0359 and 1.0205. We always respect the range until it breaks but when we look at our 5 key drivers of the AUD the pressure is on for lower levels at the moment and likely over the next month.

Speaking of pressure the equity sell off global has stretched to its sixth straight week for the US markets and the pressure is building as the data flow and leading indicators are weak. looking at our favourite US Indicator the ECRI we see that it is now down for the 7th week in a row.

The following chart is courtesy of dshort.com

It’s a long chart so you lose a little of the magnitude of the rollover but this speaks of an enduring US weak patch. We don’t think its a soft patch, rather that the QE2 induced strength was the “sweet spot” and this is a return to post crisis trend. So as we said over at Macro this morning,

The re-run of the pre-QE2 2010 rout in equity and thus risk assets looks to be accelerating and Chairman Bernanke’s speech and remarks this week seemed more of a shoulder shrug that he is powerless to help as opposed to a  nod to the fact he was going to suit up and once more become helicopter Ben raining money on the markets.

This may be the right approach but the markets pumped up on free money haven’t liked it because without their drug du jour they have to stay lucid and that means they must focus on the data – and its WEAK.

Which brings us back to the ASX200 and the technical outlook. Obviously this is a high level macro outlook for the market so it is worth reiterating that even in weak markets you can find out performers and this is especially so if you want to go market neutral and buy one against a sold position in another weighted for market exposure.

So the outlook is never as dire as it may seem.

Certainly Australian shares have been under pressure from a weakening economic outlook though both here and abroad. And while interest rate traders and equity investors caught onto this quicker than the RBA which inexplicably appears to have only figured it our as recently as this week.

So to the technicals. The following chart shows the break of the support we highlighted last week. after the fall the market tried to break back up yesterday but closed quite weak relative to the range on the day. The Dow and S&P’s fall of 1.4% has the SPI futures closing lower overnight and we can legitimately now expect the 4473 level we highlighted to be tested for support – that’s the light blue line on the chart below.

But what about after that. As ludicrous as it may seem if this 4473/85 zone gives way then the next level of technical support is at the green line at 4286. Now we are not forecasting that level just highlighting that from a technical traders point of view that’s where the big support will lie.

So given that the ASX takes its lead to the downside from offshore, even if it lags on the way up, what about other markets. We’ll use the S&P as the global bellwether, although within a few years I reckon it will be Shanghai. Like the ASX it has support not too far below. 1238/50 to last night’s 1270 close. If it was to fall through here then we are looking at 1220, 1190 and 1148.

The S&P is already 7.5% of its recent highs and a move to 1220 would make it 11%. that is a normal run of the mill correction in our experience. It is only something deeper that investors need to be concerned about.

The market is starting to look oversold but we’ll watch the data and report back.

On this front the concern for us is that like the Japanese experience where equities kept skipping higher while the bond rally continued we see that the USD is mirroring Japans bond experience. So the fact that interest rates markets around the world continue to rally suggests to us that we do need to watch the data carefully.

On the interest rate front at home the chances of a rate hike have been priced out by the market for the next 18 months and 3 years swaps are now down at 5.10% after last night’s equity sell off. I think if 5% gives way we are looking at 4.60-80% as a low. Given the RBA’s structural tightening bias I’ll be locking in some fixed rates.

Have a great and safe long weekend

greg@lighthousesecurities.com.au

www.twitter.com/gregorymckenna

This blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial adviser we are happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

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