China remains key focus for Australian resource stocks

10.07 AEST, Monday 20 August 2012

China remains key focus for Australian resource stocks

By Ric Spooner (Chief Market Analyst, CMC Markets)

A firm opening tone appears likely for the Australian market following stronger US markets on Friday and some evidence of consolidation in China’s housing market.

Australian investors will be encouraged by a report that new home prices rose in 49 out of 70 surveyed Chinese cities during July. The strength of China’s economy will continue as a key focus for Australian resource stocks. The unwinding of a perceived bubble in the housing market has been a key concern for China watchers. Early indications of basing behaviour in prices give reason for pause in bearish expectations.

Iron ore prices have now moved to a level that will make them front and centre for regular market scrutiny. At around $110 per tonne, prices for 62% fines are at the lowest level for two years and have fallen further than many anticipated. Any indication that prices are likely to average less than $100 per tonne over the medium term may put further downward pressure on some resource stocks. Any comments on the iron ore outlook by BHP may be a key focus when they release their results tomorrow.

Last Thursday and Friday’s rally in the S&P/ASX 200 index propelled the market into the next leg of an uptrend that has been in place since June. From late July, the momentum of this rally has been strong suggesting that the trend is now in a strong and impulsive extension phase. However, resistance at around 4450 looms as a key benchmark. A move above this level would take the index out of the range that has confined it over the past year indicating further upside potential.

The market may become hesitant as it approaches the key 4450 resistance area, particularly given key upcoming events for Europe including negotiation of further aid instalments for Greece, the German court decision Euro bailout funds and further detail on the ECB’s plan to buy Spanish bonds.

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