Markets will remain nervous about debt in China

10.04 AEST, Monday 24 June 2013

Investors starting to see value in banks but markets will remain nervous about debt in China

By Ric Spooner (Chief Market Analyst, CMC Markets)

Investors are likely to start the new week cautiously as they gauge ongoing reaction to last week’s Fed announcement and concerns over the credit situation in China.

The valuation adjustment for tapering of Fed stimulus is well underway. While it may have further to go a substantial valuation adjustment has already occurred in the Australian market. The strength of buying in bank stocks off Friday’s lows and similar levels the week before suggests investors chasing dividend yield are starting to see real value around those prices.

Markets will be relieved at news of a sharp drop in short term interest rates in China at the end of last week. However, signs of a possible credit crunch last week have caused the market to take a closer look at the possibility that debt problems in China may in fact be sufficiently serious to lead to downward revisions in the outlook for economic growth. Consequently economic news from China and its money market conditions are likely to remain front and centre as a key driver of Asian stock markets.

From a technical point of view it would take a rally past the May high at 5249 to provide conclusive evidence that the downward correction has ended. Any rally we do see at this stage is more likely to be a corrective bounce in an ongoing move lower. The 200 day moving average represents near term resistance around 4760 with the 50 day average currently cutting in at about 5000. If we do ultimately see a deeper correction the 50 and 61.8% Fibonacci retracements of the 3985/5249 rally form a potential zone of support between about 4450 and 4600.

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