Stimulus initiatives boost confidence of local market

Stimulus initiatives boost confidence of local market

By Ric Spooner (Chief Market Analyst, CMC Markets)
16 July 2012

International risk markets are beginning to reposition for the possibility that the current international economic downturn is bottoming.

Confidence, although brittle, has the potential for further improvement against a background of ongoing stimulus initiatives in China and stabilisation of the situation in Europe. The Australian market will be encouraged this morning by comments from China’s Premier Wen Jiabao recognising that although within target, momentum for recovery in growth was not yet in place. This leaves the way open for further stimulus initiatives. At the same time investor confidence will be encouraged by Italian bond auctions on Friday where investors pushed the yield on three year bonds down from 5.3 to 4.65%.

The technical profile of major international share indices highlights the relative weakness of the Australian market in recent months. The US S&P500 and German DAX for example remain above their 200 day moving average, with the DAX bouncing off the average and rallying strongly late in the week. Our market is however, below the 200 day moving average which is currently at around 4200. This level remains a key resistance for our market. A clear break above 4200 may be a key indicator of returning investor confidence.

Most economic statistics over the next few weeks will relate to June when concerns over the European situation were at a peak. Although these figures will provide insight into the impact of low confidence in this period, markets will now be more focussed on the extent of any recovery in July and August that may flow from stabilisation of the situation in Europe and the impact of the RBA’s rate cuts.

The US profit reporting season which will be well underway this week will have a key impact on sentiment on international share markets. Investors will be assessing the impact of fragile confidence and a stronger US dollar on corporate profits. The June quarter production reports of major mining companies will provide insight into the June half profit reports and may also have a bearing on the S&P/ASX 200 index this week.

www.cmcmarkets.com

ENDS

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