Caution likely as investors await developments in Crimea

Caution likely as investor await developments in Crimea and China

By Ric Spooner (Chief Market Analyst, CMC Markets)

The stock market looks likely to start the week with a soft tone. Investors are likely to follow the US lead, taking a cautious approach ahead of the West’s diplomatic response to the situation in Crimea. The nature of any sanctions announced will be a near term focus for markets. The potential for any increase in commodity prices and a reduction in the export revenues on which Russia is reliant are key issues.

Markets will also start the week with a watching brief on China’s economy. Following last week’s soft economic data and news that the trading band for the Yuan will be widened to 2%, markets now attach some probability to the possibility that authorities will move quickly to stimulate the economy with a cut to bank reserve requirements. While markets might have an initial positive reaction to this news, investors will also be conscious that any move by authorities could indicate the extent of their concerns over economic growth.

Despite background concerns over China’s economy, investors in the big resource stocks will appreciate confirmation that BHP will move to implement a buyback when its debt falls to $25bn. On current projections this looks likely to occur in the middle of this year and will be a supportive element for the largest stock in the index

At the end of the day, the S&P/ASX 200 index has gone nowhere so far in 2014. On Friday it finished down 0.4% on its 2013 close. This is not a surprising result given generally full valuations for a lot of stocks. From a technical point of view, one of the emerging possibilities is that the market is forming a large consolidation pattern. The fact that the index formed a peak at the same level as its last major peak in October creates the possibility that a large ascending triangle is forming. The boundaries of this formation would be the recent peaks at 5457 and an upward sloping trend line at around 5070. This represents a range of about 7% of the index. Closer by, the 38.2% Fibonacci retracement of the last major rally provides potential support around 5300.

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