Nervous start for stocks

Weaker US markets and ongoing commodity declines makes for a nervous start for stocks

By Ric Spooner (Chief Market Analyst, CMC Markets)

We are likely to see some further risk reduction and selling pressure this morning as the market heads into the profit reporting season. Mixed profit results combined with relatively high valuations in some of major US stocks, especially in the tech sector has seen ongoing selling in the US market that is adding to international stock market nervousness due to concerns over emerging markets.

Although China’s official PMI was in line with expectations with a read of 50.5, it shows ongoing declines in export orders and manufacturing employment that will do little to arrest current negative sentiment towards the emerging market sector. This was evident in ongoing weakness in commodity prices which will weigh on sentiment towards resource stocks this morning. Today’s release of China’s services sector PMI may further influence investor thinking on the state of China’s economy.

Investor attention will also be focussed on this morning’s building approval statistics. Recent figures have suggested that low interest rates and improving confidence are finally leading to a situation where dwelling starts are growing to meet the housing backlog. The market will be looking for this to continue as an area of potential strength for the Australian economy.

The key question for technical analysts at present is whether current weakness in the ASX 200 index is merely a correction of the rally from 5028 to 5381 or the start of something larger. A move below 5028 would resolve this issue in favour of potential for a larger corrective decline. In the meantime, the 200-day moving average around 5145 represents near term support while the 20-day moving average provides resistance at 5277.

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