Market Likely To Begin A Heavy Data Week In A Cautious Mood

10.07 AEST, Monday 3 September 2012

Market Likely To Begin A Heavy Data Week In A Cautious Mood
By Ric Spooner (Chief Market Analyst, CMC Markets)

The weekend announcement of China’s weaker than expected PMI reading will set the tone for cautious trading this morning. In many ways this figure does not add a lot to the current understanding of conditions in China’s manufacturing sector. Industrial production growth rates have been weakening for some time and other indicators such as export growth and weakening iron ore prices have been showing a clear trend of manufacturing decline. However, given the importance of China’s manufacturing sector to Australian resource stocks and the recent sharp fall in iron ore prices, investors are sensitive to the possibility there is still worse to come. The worse than expected PMI reading and its decline under 50 do not suggest any bottoming out at this stage.

In these circumstances, iron ore prices are likely to be a key focus for investors in coming weeks. There is a zone of support for the 62% fines prices between $80 and $86 per tonne. The best case scenario for resource stocks would be a V shaped recovery out of this support zone indicating that prices were recovering after short term inventory adjustment by steel producers.

There are a number of events this week that could have a material bearing on investor attitudes towards risk. Possibly the most significant of these will be the European Central Bank Meeting on Thursday. It’s possible that the bank will release further details on plans to buy Spanish bonds. The adequacy of this plan will have a key bearing on confidence. The possibility of high Spanish bonds becoming a catalyst for a Euro crisis remains a key barrier for investor risk appetite.

Other important data releases this week, include the US employment growth figures on Friday and a range of statistics on economic activity in China during August. The US jobs figure follows a surprisingly strong number in July. Signs of continued improvement would be encouraging but may have a perversely negative impact for markets in potentially delaying further Federal Reserve stimulus initiatives.

If the Australian retail sales figure released this morning is moderately positive as expected this will continue a trend of improved retail activity in recent months.

The S&P/ASX 200 index has been in what, at this stage, looks like a minor correction since its peak on 21 August. A break below support around 4285 would start to make this correction look more significant with potential for a move back to more significant support levels including the 200 day moving average at around 4215. On the upside, there is established resistance in the index at around 4475. A move above that level is likely to imply new levels of investor confidence.

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