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Stock market takes a breather while Aussie dollar gets going

09:30 AEST, Wednesday 5 February 2014

By Ric Spooner (Chief Market Analyst, CMC Markets)

The stock market looks set for a steady day as world markets last night took a breather from the previous day’s heavy selling.

The rally in risk markets last night extended to emerging market currencies and commodities as well as equities, and indicates that investors are assessing the wisdom of continuing to switch out of these assets into developed nation bonds, given the size of recent market moves and the outlook for continuing growth in world economies.

Even so, markets are likely to remain cautious at this stage. The size of yesterday’s moves indicates substantial selling momentum that is not yet being met by large scale bargain hunting. Last night’s rallies were typical of the kind of minor consolidation that follows heavy selling and conservative buyers are likely to want more comfort that they are not standing under the proverbial knife before committing to the market at current levels.

Unlike the equity markets, the strong rally in the Aussie Dollar yesterday is suggesting that it has not only formed a base but is developing significant upward momentum. With the RBA removing the punch bowl for Aussie dollar bears, there is a short covering scramble as investors focus on the potential for the ongoing carry trade into this AAA rated currency with rates staying near zero for some time in Japan, Europe and probably the US.

ENDS

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