Weak start expected at open following negative US sentiment

09.55 AEST, Thursday 23 May 2013

Weak start expected at open following negative US sentiment overnight

By Miguel Audencial (Sales Trader, CMC Markets)

Market participants witnessed a roller coaster trading session in the US markets overnight. Sentiment quickly shifted from bullish to bearish as US Fed Chairman Bernanke revealed the possibility that asset purchases may be scaled back in the next few meetings. Investors saw this as a notable contrast from an earlier prepared statement that “premature tightening may strangle the economic recovery”.

The release of the minutes from the US Fed’s recent meeting prompted investors to display additional caution after it revealed a number of officials are inclined to scale back the bond buying program as early as the next meeting in June. The minutes showed there was no clear consensus to the current quantitative easing program which brings about uncertainty. The market often punishes uncertainty and we saw this in the major asset classes overnight.

US equities, gold, oil, and the majority of currencies traded against the US dollar, saw price slides following Bernanke’s revelation that asset purchases may be scaled back in the next few months. These instruments faced further pressure after the release of the minutes.

It’s unlikely the Australian market will be spared from the negative sentiment caused by the US Fed Chairman’s comments with a weak start expected at the open. I expect the energy and materials sector will underperform as crude oil and commodity prices were weaker from overnight trading. Importers may see some positives from the further weakness of the Australian dollar.

I expect the local equities market will be under pressure for the rest of the trading session unless the HSBC Flash Manufacturing PMI number released later today significantly surpasses expectations of a 50.5 reading.

I also anticipate increased volatility in the short term as investors continually adjust their predictions on when the current bond buying program from US Fed will slow down.

The market’s reaction to US economic data may now be harder to predict than usual with some investors considering a good economic figure as an indication of poor future market performance due to the increased possibility that asset purchases could be scaled back sooner.

Flash Manufacturing PMI figures from China, France and Germany will be released later today. In the US, weekly unemployment claims and New Home sales are schedule to be released tonight.

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