Market direction to be determined by the outlook

11.22 AEDT, Monday 15 October 2012

Market direction to be determined by the outlook for economic growth and earnings forecast
By Ric Spooner (Chief Market Analyst, CMC Markets)

Investors have expanded PE valuations as concerns over the European crisis receded and as Australian investors chase search dividend yield in a context of falling bank deposit rates. Market focus has now turned towards the outlook for earnings.

Statistics from China and the US as well as outlook commentary from the US profit reporting season have the potential to provide further insight into the outlook for earnings growth and so move markets this week.

China’s export growth of 9.9% got things off to a good start leading into Thursday’s September quarter GDP report. Although these figures are volatile from month to month, the fact that the iron ore price has been able to consolidate at well above $100 per tonne, and a relatively firm copper price are encouraging signs. This improves the likelihood that the correct interpretation of recent Chinese data is that it will achieve a soft landing at around the 7% GDP growth level.

This week’s retail sales, industrial production and housing starts statistics from the US will also impact on the outlook for global growth and the resources sector. The improved outlook for US housing has assisted the copper market at a time when China’s growth has been slowing. US housing starts have averaged 733,000 over the past 6 months compared to 612,000 last year. There is potential for this to keep growing towards 1 million as the backlog of unsold houses clears and the population grows. This would be a supportive development for world growth and the copper market in particular.

From a technical perspective, last week’s high in the S&P/ASX 200 index at 4512 now looks quite significant. A break above this level would signify improving market confidence on the earnings outlook and creates the possibility of a further rally towards resistance at around 4620/4650. Looking at the alternative, a break below support at 4421 would signify pessimism on the growth outlook with potential for a deeper correction to support levels between 4250 and 4300.

ENDS

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