Markets cautious ahead of data heavy week

10.18 AEST, Monday 3 June 2013

Markets cautious ahead of data heavy week
By Ric Spooner (Chief Market Analyst, CMC Markets)

While the local market is likely to open lower this morning, the extent of the decline may be tempered by the weekend release of China’s better than expected manufacturing PMI.

The PMI reading of 50.8 will give investors reason to pause before assuming an ongoing moderation in China’s economic growth rate. Even so, markets are likely to be cautious ahead of a data heavy week that will see a number of releases with potential to influence the outlook on key drivers.

One of the key macro drivers for markets at present is the potential for price earnings multiples in defensive, high yielding stocks to fall towards historical long term averages. This is happening as investors begin to anticipate the tapering and eventual withdrawal of monetary stimulus in the US. Friday’s employment number could have an important bearing on market attitudes with a strong figure bringing forward expectations of Fed tapering.

The health of China’s economy and the outlook for Australian growth are the other key market drivers. While the China’s PMI figure is encouraging, investors are likely to wait on next weekend’s data on industrial production and retail sales before drawing too many conclusions.

Domestically, this morning’s release of retail sales for April will be closely watched. A positive reading of around 0.3% would cement a view of trend improvement over recent months with consumers making a solid contribution to overall economic growth. This result would make another cut in rates at tomorrow’s RBA meeting even less likely.

From a technical point of view, the S&P/ASX 200 continues to look like it is correcting the rally from 3985 to 5249. While the early April low at 4883 is providing some support, the 4730/4800 band represents a more significant support zone. This includes the 38.2% retracement level, the 200 day moving average and the trend line from when the major rally began.

The Aussie Dollar is beginning to show signs of divergence with the momentum oscillators. In these circumstances stronger than expected data on the Australian or Chinese economy in coming days could set up for a significant corrective rally.

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