Index Up Moderately in Early Trade

Index Up Moderately in Early Trade

By Ric Spooner (Chief Market Analyst, CMC Markets)

China’s 0.5% cut in reserve ratio requirements has encouraged Australian investors to hold the line with the index up moderately in early trade.

The major banks (with the exception of Westpac which is trading ex-dividend this morning) are all trading higher. Investors are encouraged by the fact that the banks have been able to restore their interest margins recently. The general outlook for lower interest rates is also likely to be supportive for the banking sector.

The weekend’s announcement of China’s reserve ratio requirement has tempered response to the news of continuing moderation in its industrial production; retail sales and housing market. Even so investors are unlikely to be too bullish in their response to China’s easing of monetary policy at this early stage. The early stages of monetary easing cycles are often associated with declining equity markets. Central authorities are easing conditions in response to deteriorating conditions. It may be some time yet before the cumulative impact of the easing in China’s monetary settings is sufficient to give markets a sense that an upturn in the business cycle is imminent.

The Australian share market is also being supported by the weaker currency. Equity investors are often unresponsive to relatively small currency fluctuations. They are influenced, though, by changes in the medium term outlook for exchange rates. The 0.5% cut in Australian interest rates and weakening conditions in China has changed attitudes toward the Aussie, with many traders now seeing a decline to the .93-.95c zone against the USD as a possibility.

The likelihood of Greece being forced back to the polls in June and the prospect of an improved vote for anti-austerity parties will be unsettling for markets, making it hard for risk markets to gain substantial ground until investors have a clearer idea of how this situation may play out.

From a technical perspective, the S&P/ASX 200 index broke through the bottom of a trend channel last Monday. This support line now represents potential resistance for the market and intersects at around 4340. The 200 period moving average at around 4216 represents near term support.

ENDS

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