Modest gains expected on local market

10.02 AEST, Thursday 16 May 2013

Modest gains expected on local market

By Miguel Audencial (Sales Trader, CMC Markets)

The Australian share market is expected to post modest gains at the open despite the major US share market indices reaching another set of highs overnight.

With the lack of any Australian economic figures scheduled today, it is hard to see how the Australian equities market will finish today’s session with notable gains. There is good indication that investors are currently overweight in US equities riding the wave of its momentum and the recent strength of the US dollar.

The US equities market managed to extend its highs despite weaker than expected US Industrial Production and an unexpected negative reading of the Empire State Manufacturing Index released last night. These weak economic readings prompted traders to anticipate that the economic stimulus from US Fed is likely to continue or at least the manner of the deceleration of the current Quantitative Easing program is likely not to be as abrupt as initially anticipated.

A weak reading that resulted in a stronger market was also evident in the European session overnight. Their GDP quarterly figure showed that their economy contracted more than anticipated which counter-intuitively resulted to higher stock indices. The reason for the rise is that this weak figure increased expectations of economic stimulus from the European Central Bank.

Crude oil prices ended higher overnight as inventories unexpectedly decreased. However, the medium to long term demand is a concern due to the higher than expected GDP decline in Europe and weak industrial production and manufacturing data from the US. The recent strength of the US dollar is also likely to dampen the demand for crude oil. Despite the reported drop in inventories last night, the overall supply still remains at high levels which may put pressure on the crude oil price.

Japan will release preliminary GDP figures later today and it will be interesting how much the recent devaluation of the yen impacted the Japanese economy in the past quarter. In the US, there are a number of important economic data to be released, including building permits, core CPI, Philly Fed Manufacturing Index and the weekly unexpected claims.
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