Investors Reassess State of Play in Europe

Investors Reassess State of Play in Europe

By Ric Spooner (Chief Market Analyst, CMC Markets)

Australian markets rallied this morning as investors assess whether valuations have been discounted enough to reflect the current state of play in Europe.

After relentless "risk off" selling throughout much of May, the task before investors and traders is now to assess how much risk premium is appropriate. At some stage markets will pause and await further developments given that:

§ although a default by Greece looms as a real possibility it is far from a certainty in the near term

§ the contagion impacts of a default are a major concern but difficult to assess given that it is no clarity on how a default would actually be managed.

A couple of events over the weekend have the potential to cause at least a short term breather for markets. Firstly the G8 statement that emphasised the need for growth is a reminder that the ultimate outcome of the current potential political process in Europe may be a positive. It has the potential to reduce the emphasis on austerity only as a near term solution.

Secondly, Premier Wen Jiabo's statement giving "more priority to maintaining growth" foreshadows further monetary easing and efforts to stimulate the domestic economy in China.

The rally in major resource stocks this morning acknowledges the potential for China’s growth rates to improve in response to stimulus initiatives towards the end of this year and into 2013.

In a relatively quiet week for economic data releases China’s flash PMI due for release on Thursday will be potentially significant for investors in Australian resource stocks as it provides insight into the current state of China’s export oriented manufacturing sector.

Although the Australian market has rallied this morning, the potential for significant corrections is likely to be limited unless investors are given a clear reason to believe that the risk of default by Greece has been averted for the medium term. Initial technical resistance at 4190 and above that at 4235/4270 may be the upside limit of any correction.

ENDS

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