Weekly Market Wrap: Central Banks Act to Rescue the Eurozone September 16th, 20110
Globally markets are recovering from their sell-off earlier in the week, triggered by problems with eurozone banks and the disjointed approach by the region?s leaders to backing the European Financial Stability Fund (EFSF). These concerns resulted in Moody?s downgrading the ratings of two French banks, Societe Generale SA and Credit Agricole, citing liquidity issues.
This has prompted German and French leaders to confer and commit to assisting debt-laden Greece to remain as part of the eurozone. A global equities rally has been triggered on the third anniversary of the Lehman crisis, the event that sparked the GFC, as authorities have now taken proactive action to address the liquidity issues in the financial system across Europe. Five of the world?s largest central banks have coordinated their efforts to free up the European banking system, by deploying dollars into the system. This will take some pressure off European lenders that have had trouble borrowing the US currency, but has also highlighted the funding issues those lenders currently face.
US stock markets have risen for a fourth consecutive session of gains and are attempting to form a base. UBS shares dropped -10% after the Swiss bank said it would likely post a third-quarter loss after a trader booked $US2 billion in losses through what it said was unauthorised trading.
European stock markets sold off heavily early in the week but are recovering. The German and French markets are bouncing off 2-year lows, while in London the market is relatively stronger and holding above recent lows (similar to the US).
Many Asian stock markets have had holidays this week. The Hong Kong and Chinese markets are trading around 52-week lows, suffering from the concerns in the eurozone and additional domestic concerns over further monetary tightening measures by the Chinese government.
Our View for the Australian Market The Aussie market is ending the week on a positive note, as it managed to bounce off a key psychological level around the 4000 mark. The news that major central banks are taking action to ensure there is continued liquidity within the eurozone?s financial system is significant ? now all they need to do is agree on the EFSF funding package to bail out the PIIGS economies in the eurozone (easier said than done).
Local economic data has again been mixed this week. Robust trade figures failed to spark the market earlier in the week, after the Australian Bureau of Statistics (ABS) reported Australia has posted a trade widening surplus for the fifth consecutive month, as mining exports continue to hold weight in the face of a global economic slowdown. The balance on goods and services was a surplus of $1.826 billion in July, and this compares to the downwardly revised surplus of $1.817 billion in June.
The Federal Government?s Bureau of Resources and Energy Economics (BREE) also reported that the value of Australia?s resources and energy exports surged by 27 percent last financial year to a record $175 billion. Iron ore export earnings jumped by 56 percent to $54 billion in 2010-11.
The Westpac-Melbourne Institute reported that the Consumer Confidence Index rebounded strongly in September, up by 8.1 percent, showing that a recovery in economic growth and diminishing expectations of an interest rate hike has reassured householders; this followed an August reading which had fallen to the lowest level since May 2009.
However investor mood was dampened by news that the ABS has revised second quarter inflation lower, with core inflation down to 0.6 percent in the second quarter from the 0.9 percent reported in July, indicating price growth is not as strong as previously predicted. This prompted the National Australia Bank to say it now expects core inflation to remain between 2.5 to 2.75 percent until 2013, taking the pressure off the RBA for further interest rate rises.
We are definitely in a trader?s market, and the market looks like it wants to run higher into the end of the quarter as it recovers from its very oversold state. The S&P/ASX 200 index is attempting to swing higher, but it needs to trade above the month?s high to confirm the momentum. The key resistance level remains around 4360 near term and the market held the 4070 key support this week.
Stock prices will to continue to experience volatility near term, but a base appears to be forming in the index near-term. In commodities the standout performer has again been the gold volatility play, as the gold price reached a high above $US1,850, but has now retraced all the way back below $US1,780 in quick time. Gold is currently trading above $US1,778 but this volatility could be pointing to a double top. Crude-oil prices held around $US90 per barrel, this has provided support for energy stocks near-term.
The other key driver for markets near-term will be the performance of the US and Euro dollars. The US dollar index is holding above four-month highs, while the Euro dollar has broken down out of its trading range, which could be a negative for equities and commodity prices if this continues.
Investors will be cheering the coordinated central banks? effort to inject liquidity into the eurozone, however there is still the issue of eurozone bank solvency to contend with. Remain attuned to the news from overseas, particularly from China, Germany and the US regarding their economic growth and debt issues.
The S&P/ASX 200 is currently trading at 4160 having found key support at the 4070 level this week. Key levels for the index next week will be 4360 and 4070
(20min delay)