Investors unwind following Euro leader’s summit

10.06 AEST, Monday 2 July 2012

Investors unwind following Euro leader’s summit

By Ric Spooner (Chief Market Analyst, CMC Markets)

Technical resistance between 4160 and 4200 on the S&P/ASX 200 will provide a useful gauge of investor reaction to Europe’s latest initiatives.

Having had the opportunity to assess the implications of the Euro Leaders’ summit over the weekend, the likely market reaction will be to further unwind some of the risk premium that had been built into share valuations prior to the Summit.

The market had been priced for an expectation that the Summit would fail to produce any initiatives likely to change the balance of risk in Europe. Friday’s in principal agreement that the Stability Fund can directly recapitalise troubled banks is a potentially important step towards sharing credit risk within Europe. This is a necessary move towards creating a firewall that prevents individual countries bringing the currency down.

How effective this move turns out to be will depend on the conditions attached to funding requirements, and whether the ESM is adequately funded to provide an effective firewall. Even so markets are likely to recognise the Summit’s in principle agreement as an advance that deserves some reduction in risk premium.

Despite the large moves on Friday, most international equity markets have not yet cleared the resistance represented by the mid-June peak. Whether or not international index markets clear this hurdle will provide some insight into how positively the Euro Summit is initiatives are regarded. This resistance zone for the S&P/ASX 200 Index is between 4160 and the 200 day moving average which intersects around 4190.

Investors will also be influenced by quite a bit of evidence this week on the extent to which the blow to confidence from the latest Euro crisis impacted on world economic growth during May. Amongst the most significant figures for Australian investors will be the international manufacturing PMI’s, the US Non-Farm Payrolls on Friday and Australia’s retail sales, building approvals and trade balance statistics.

ends

© Scoop Media