Market wrap: The Australian stock market is set to start the week more than 1% higher after a late rally on Friday snapped Wall Street's three-day losing streak.
The June SPI futures contract ended the session 58 points ahead at 4358 after a flurry of buying in the last half-hour in the U.S. raised hopes of a reversal on oversold global markets this week.
The S&P 500 came back from a -1.5% morning low to close 1.5% higher as the euro gained for a third day and industrial metals bounced back on speculation that this month's rout in "risk assets" has overshot to the downside. The Dow closed 125 points or 1.25% higher at 10,193 and the Nasdaq added 1.14%.
"Technically speaking we're very oversold - really that's the understatement of the year," a U.S. capital manager told Bloomberg. "I'd rather be buying now than I would three weeks ago."
Financial shares in the S&P 500 jumped 3.6% as investors interpreted the Senate's passage of legislation to reform the banking industry as easing uncertainty surrounding the outlook for the sector. Senators approved restrictions on proprietary trading by banks and introduced a consumer protection agency to protect borrowers against abuses. The legislation now needs to be reconciled with a similar bill passed by the House of Representatives in December.
"As long as people feel like they know what the rules are, they feel like they can position themselves to make money," a U.S. trader told MarketWatch. "It's the possibility that the rules might change in the middle of the game that scares people."
The euro hit its highest level in a week against the U.S. dollar amid speculation that short-sellers were covering their positions. Last week saw the euro's largest weekly gain in eight months. On Friday, German legislators approved their country's share of a $1 trillion bailout package.
In other signs of an easing in tensions, the cost to protect against defaults on U.S. corporate bonds retreated, and the VIX or Volatility Index fell 12.5%.
There was relief for battered industrial metals as falling warehouse inventories brought buyers back to the market. Copper futures for July delivery climbed 4% in New York, the biggest gain for the most-active contract since February.
"Putting the technicals and volatility aside, [copper] inventories at the London Metal Exchange and in Shanghai have been falling consistently for some time now, and the market has really been ignoring that with this downturn," John Gross, publisher of the Copper Journal, told Reuters.
In London, copper rallied 3.2%, aluminium 2.9%, lead 3%, nickel 0.9%, tin 1.2% and zinc 1.1%.
A short-lived rebound in oil faded to a ninth straight loss. Crude futures closed 76 cents or 1.07% lower at $70.55 a barrel. Gold also continued a gentle decline from the heights of two weeks ago. The spot price closed $6 or 0.6% lower than Thursday's New York close at $1,177 an ounce.
The major European markets trimmed losses late in the session but still ended Friday lower. Britain's FTSE dropped 0.2%, Germany's DAX 0.66% and France's CAC 0.05%.
TRADING THEMES THIS WEEK
RELIEF RALLIES: Or perhaps dead cat bounces. Technically, a host of markets look oversold, including Australian equities, base metals and oil. Friday's overseas action provides a platform for some relief in the first half of this week, but reversals may be short-lived, depending on events in Europe, Korea, further signs of slowing in China or more evidence of deterioration in the U.S. recovery. The medium-term trend is currently bearish and that means rallies are likely to be sold into, rather than dips being bought. Caution should prevail until the outlook improves.
EUROPEAN EMERGENCY MEETINGS: Last week ended with optimism that a weekend of meetings will produce further action on the European debt crisis by the European Central Bank or European Commission. Investors remain troubled by continuing evidence of disagreement within the euro-zone over how to tackle the crisis. European leaders need to speak with a single voice and frame a unified approach but the very nature of the EU with its competing interests makes that extremely challenging. The future of the euro and perhaps the EU in its current form hinge on how the next few weeks play out. We await news.
ECONOMIC NEWS: It's a relatively quiet week for local economic news. Monthly new motor vehicle sales are duet today at 11.30am. The U.S., on the other hand, has a full schedule, starting tonight with existing home sales and accelerating as the week goes on.
