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Rally Leaves Market Vulnerable To Big Data Week

10.17 AEDT, Monday 3 December 2012

Rally Leaves Market Vulnerable To Big Data Week
By Ric Spooner (Chief Market Analyst, CMC Markets)

The Australian market heads into a new month and a big data week more vulnerable to bad news after rallying 4% from its mid-November low.

Early trade this morning is likely to see the market relatively firm on Friday’s closing levels. The weekend’s announcement of a 50.6 reading for China’s manufacturing PMI should set a firm tone for our market. Although this figure is a little below consensus expectations, it’s consistent with the run of recent data pointing to a recovery in China’s GDP growth.

This morning’s retail sales figure probably won’t change thinking much on tomorrow’s RBA decision. With consumer confidence improving and the impact of previous rate cuts flowing through, the general expectation is for moderate growth in retail sales. If this turns out to be the case it will reinforce a scenario where tomorrow’s rate cut decision will be fairly line ball. If the bank does cut rates it’s likely to be based more on its view of the prospective impact of lower mining investment and tighter government fiscal settings than on any signs of a deterioration in current economic conditions.

Like many other risk markets, the Australian share market has staged a decent rally over the past couple of weeks. This reflects an emerging view that the Fiscal Cliff negotiations in the US are more likely than not to produce a reasonable outcome that avoids pushing the economy back into recession. Even so it’s inevitable that government debt reduction will be a significant drag on the world’s largest economy in coming years. This is likely to prevent GDP growth being much better than about 2.5% even under a relatively optimistic scenario. This together with the risk of fiscal cliff negotiations running into trouble may put a cap on the current share market rally in the near future.

From a technical point of view the recent rally in the ASX 200 may yet prove to be only a correction against a larger decline. At this stage the market would need to take out the October peak at 4582, to provide greater certainty that the medium term rally off the June lows has resumed. There is short term support for the index around the 50 day moving average at 4454. This may hold the market at the moment in the absence of a significant change of sentiment.

CMC Markets Asia Pacific


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