Markets Set To Follow International Markets Lower

09.42 AEST, Friday 18 May 2012

Markets Set To Follow International Markets Lower
By Ric Spooner (Chief Market Analyst, CMC Markets)

The Australian share market is set to follow US and European markets lower today.

Investors are again facing a dilemma they have become well used to in recent years. They need to choose between what will be cheap share valuations if Europe can resolve the current crisis and unknowable but potentially large risks if the situation continues to unravel.

At the moment, safety first seems the sensible option to most equity investors. The possibility of rising bond rates placing pressure on major European governments and questions over confidence in some European banks is difficult to ignore at this stage. Problems in Europe will lead to a retreat in international consumer and business confidence and potentially restricted credit markets.

The Australian index might normally get some support from the fact that copper and other commodities held their ground last night. However, this is likely to be overshadowed by general risk aversion. Commodity markets are beginning to contemplate the possibility of additional central bank quantitative easing if the European situation continues to deteriorate. The sharp rise in gold last night indicates investors are looking towards alternatives to the US Dollar as a safe haven.

Assuming the S&P/ASX 200 index breaks below trend line support at around 4128 today, the next significant support levels are previous lows at around 3970 and 3765.
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