Market to remain in wait and see mode

10.19 AEDT, Monday 4 March 2013

Market to remain in wait and see mode
By Ric Spooner (Chief Market Analyst, CMC Markets)

The stock market is likely to start the week in a holding pattern. Weaker base metal and oil prices are likely to weigh on sentiment, particularly in the resources sector. This will offset what may otherwise have been a positive reaction to Friday’s stronger US PMI indicating ongoing improvement in the manufacturing sector.

Investors are now likely to stand back and assess the extent of any impact that fiscal tightening in the US and the Italian election result have on world economic growth over coming months. The question before markets is how much these events will impact consumer and business confidence. If consumers are prepared to look through these problems then the US economy still has the capacity to grow at 2% or better this year and world economies, collectively at 3% or better.

The RBA is likely to be in the same mode as investors this week, adopting a wait and see position and keeping rates unchanged unless there are future signs that global conditions are deteriorating or the local economy slowing.

Today’s building approvals and business indicators figures will be important pieces in the jigsaw of the overall domestic economic outlook. Monthly building approval figures are very volatile from one month to the next. However, this is one sector of the economy that will need to show steady improvement to counter the impacts of tighter fiscal policy and lower mining investment. As a minimum, analysts will want to see a trend of approvals continuing to exceed the 150,000 pa rate over the medium term. Corporate profits in the December quarter are likely to be negative reflecting tough conditions in the small business sector.

Although, the S&P/ASX 200 index has effectively, moved sideways over the last eight trading days and is in the early stages of a possible double top, the uptrend remains intact and within the trend channel that has defined the rally since November last year.

Both the support and resistance levels determined by the channel are rising quite steeply over time. The channel support is now at about 5025 and the 20 day moving average currently at 5007. It would take a break below these levels to indicate real weakness and the potential for more than a minor correction. The trend channel resistance is currently at about 5130 with older resistance above that at around 5172/5186.
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