Markets to remain range bound despite firm opening

Markets to remain range bound despite firm opening

By Ric Spooner (Chief Market Analyst, CMC Markets)

While the Australian market looks set for a firm opening this morning, the index will test the upper end of the range established over the past week and may find it difficult to move convincingly past this level in the absence of fresh news.

Recent trading behaviour suggests that investors have coalesced around a macro view on the current economic outlook. This broadly involves a scenario in which the US Fed will begin to taper its QE programme towards the end of this year, while growth in both Australia and China will be relatively moderate with the possibility of more rate cuts to come in Australia. Any changes to this outlook are likely to be data driven. Wednesday’s second quarter CPI for the local economy and China’s Flash PMI for July are looking like the first significant releases on the trading horizon as the investors wait for the profit reporting season to get under way in August.

From a technical point of view, the S&P/ASX 200 index is showing signs of establishing a short term trading range. It may take a break outside this range to establish near term direction. The upper end of this range is bound by last week’s high and the 61.8% retracement of the May/June decline. This resistance is at around 5013. While a rally today would confirm support for the lower end of the range around last week’s lows at 4960, it would take a strong move well clear of the 5013 level to indicate ongoing strength. Any decline below the 4960 support could see a drift down towards the supports of the 50 day and 200 day moving averages currently at 4913 and 4808 respectively.

Weekend developments in the potential for ongoing structural reform in Asia may also set the tone for local trading today. Markets had already rallied in anticipation of Japanese Prime Minister Abe’s LDP party regaining control of both houses of Parliament and in fact sold quite heavily on Friday as profit takers moved to get set in advance of the expected outcome. Even so, longer term investors will take heart from the improved potential for structural reform in Japan and from China’s abolition of minimum bank lending rates. This is further evidence of the reform credentials of the new leadership and is a step in the direction of freeing up capital markets to allow more efficient allocation of capital within China’s economy.
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