Australian Market Weekly Wrap

What a week, equities tested out target on the ASX200 at 4473, the Aussie Dollar reinforced the bottom of the range in the mid to high 1.04’s, 3 year swap rates held the really important 61.8% support level in the 4.98/5.00% zone and RBA Governor Stevens swung a few punches in defence of the RBA’s Tightening bias.

That’s before we even start talking about what is going on, or more precisely not going on, in Europe at the moment as Politicians dither and Central Bankers stand firm. In the US the economy is clearly weakening and the data flow is poor and likewise in Australia we continued our run of weak data with the NAB business Survey and Westpac Consumer Confidence  showing further signs that the non-mining sectors of the economy are struggling regardless of what our beloved Central bank governor says about the cash being spread around the economy .

So all in all it wasn’t a great week for economies and sentiment.

But I’d argue, perhaps the glasses are rose-coloured, that the market performance this week was exceptional insofar as the excuse for dislocation and a crash was there but we only saw weakness and important levels held. That’s not to say that I’ve changed my view on the need for options cover to protect the downside because the outlook remains so uncertain but IF this Greek issue  gets fixed to the satisfaction of the broader market there is going to be one heck of a relief rally.

I’ve posted my Australian Dollar Weekly Wrap over at MacroBusiness this morning and the high level summary is that even though it is range bound between 1.0440-1.0770ish at present it looks like it might be building a base for a rally toward the highs in the next couple of weeks. Obviously 1.0440 needs to hold – but here is the chart.

But the preconditions for a sustainable rally above the high of 1.1013 are not there yet so I’d still be locking in cover if I was an importer up there if we see it.

In equity markets the ASX hit our target bang on. here is last week’s chart and then I’ll follow-up with this week’s and some commentary below.

 Last Week

 This Week

What you can see in the chart above for this week is that the ASX200 is clearly in a downtrend but that it has held the 4473/85 zone we talked about last week as an important target and support zone.

The Daily correlation between the ASX200 and the Dow since January 1 this year is 0.57, since April 0.72 and since May 0.82 (remembering the closer to 1 the more the Dow influences the moves in the ASX200). So the correlation with the movements in the Dow is growing which is disappointing given we lagged on the upside and could have hoped to out-perform to the downside but that’s markets.

But this is important in the context of the Dow holding its uptrend intact from the 2009 low as we can see in the chart below.

We respect trend lines until they break and we might get a relief rally before it happens. But ultimately I expect the weak US economy (Empire State Manufacturing and Philly Fed both crashed this week) and need for recalibration of earnings expectations will drag equities lower. Should this come to pass 11,575/650 becomes the first support zone (light blue line) being the march low and 38.2% retracement level. Below this we are looking at 10,887 which is the green line.

Any relief rally for some sort of resolution in the greek debacle will probably be pretty large in the context of the last 6-7 weeks falls but the fundamentals underpinning equities are deteriorating at the moment. Thus we still like options cover.

On interest rate markets here at home the RBA Governor’s aggressive stance fell on deaf ears, well not entirely but the data and offshore markets drowned out his voice, and we only have 1 pt of tightening priced into cash rates over the next year even though the CBA is still calling for 1% and most Economists worth listening to are saying at least 1 if not 2. We think they shouldn’t move at all and while we agree that Stevens’ and the RBA’s central tendency about Mining and Inflation is right but think they underweight, probably discount, household restraint too much.

Any move needs and excuse and is thus data dependant. Certainly traders agree.

On the 3 year swaps rates this 5% zone they bounced off again this week is very solid support both in technical and fundamental terms. Fundamentally if the RBA is telling us they are going to tighten then the curve has to have a positive slope even if it isn’t that much and too that end you can effectively borrow 3 year’s at the same rate as 90 day BBSW at the moment. So fundamentally this is a great place to lock in and could give “free’ cover.

Technically you can also see why 5% is such a good support zone. Its both the recent post-earthquake low and the 38.2% retracement of the big range the 3 year swap rates have been trapped in. below here we have the next Fibonacci projection at 4.7575 which is also the cash rate. locking in anywhere here looks fantastic value. I’ll be doing it.

All up markets have held in better than they could have this week. I guess that probably still means they are hopeful that the Europeans will find a solution to the greek problems but also that there are not too many big speculative positions around. Greece is still a risk however, as is Ireland and Portugal and last night Moodys put Italy on negative credit watch, so this isn’t over yet.

It’s a relatively quiet week datawise in Australia and offshore so hopefully it will be a little quieter. All eye on Athens though still.

Have a great weekend, windy but fine on the east coast…Happy Days

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 and if you are an adviser and would like to join our network we are also happy to help.

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

, , , , , , , , , ,

Subscribe

Subscribe to our RSS feed and social profiles to receive updates.

No comments yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: