Aust: Firm tone expected from morning’s trading

10.20 AEDT, Monday 29 October 2012

Firm tone expected from morning’s trading
By Ric Spooner (Chief Market Analyst, CMC Markets)

With the benefit of a weekend’s hindsight, the Asian markets appear to have overshot to the downside in late trading on Friday afternoon. The late rally in US markets is likely to set a firm tone to this morning’s trading as our market corrects.

The potential for another interest rate cut will be a key influence for local investor sentiment this week. Market opinion on the prospect of the RBA cutting rates next week has become fairly divided in the wake of last week’s higher than expected CPI figures.

This divided opinion may see a cap on the market this week but sets up for a positive reaction next week if there is another rate cut. Investors would be relieved to see lower rates given the tightening influences of the budget and a stubbornly strong currency.

Wednesday’s Building Approvals and Thursday’s house price index data may help clarify opinion on the prospects for next week’s RBA meeting. Stronger than expected numbers would have the effect of reducing the forecast probability of another rate cut.

Internationally, the situation in Europe continues to weigh on investor sentiment. The markets are looking for a sensible compromise on Spanish and Greek austerity programs. Friday’s announcement of 25% unemployment in Spain underscores concerns that excessive budget cutting will entrench a self-perpetuating problem that will continue to overhang market valuations.

The most likely technical analysis scenario for the local market is that the S&P/ASX 200 index has embarked on a correction of the June/October rally. This outlook would be further confirmed by a breach of support at 4448/4460. If the index takes this level out, a decline to the 200 day moving average at around 4268 is in prospect.

ENDS

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