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IG Markets Afternoon thoughts 1st Sept

Across Asia, regional markets are mostly higher following the stronger-than-expected Chicago PMI figures overnight and on hopes the US Federal Reserve will implement further stimulus measures to help support the economy. The Kospi is the top performer, up 1.9% while the Hang Seng and Nikkei 225 are both up more than 1.2%. However, in China the Shanghai Composite is 0.2% softer following the in line PMI reading.

In Australia, the ASX 200 is currently 0.7% firmer at 4325, well off its earlier session highs of 4354. After better-than-expected retail sales and private capital expenditure data the local market surged 1.3% higher but has drifted in early afternoon trade. That said, gains on the day are relatively broad based with the heavyweight energy, materials and financial sectors all seeing meaningful advances. The defensively postured healthcare sector is the only sector trading in negative territory.

As mentioned above, there have been a couple of brighter signs for the domestic economy today in the retail sales and private capital expenditure figures. Everyone has been pinning their growth assumptions on the fact that the Australian resources sector was going to spend big on the capex front. These figures today have helped ease a few concerns that had emerged and shows that the Australian economy continues to remain very resilient despite the East Boast slowdown and that business spending will be one of the major drivers of growth in the coming years.

The retail sales figures were encouraging too, although one set of numbers doesn’t mean retailers are out of the doldrums just yet. The discretionary retailers like Harvey Norman, JB HiFi, Myers and David Jones all received a well overdue bounce; perhaps some participants are starting to position themselves for a discretionary spending recovery.

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Chinese Manufacturing PMI also came in as expected, although near 29-month lows as it straddled the border between contraction and expansion. This indicates that tightening measures have done their job as the economy heads for a soft landing. The outlook for further interest rate hikes looks limited too, especially given the global uncertainty currently plaguing markets.

From a technical point of view, the ASX 200 broke up through the 4324 technical resistance level today in bullish fashion, meaning the market has now printed a set of higher highs and higher lows. Short-term price action is clearly pointing to the upside, although we would be waiting for a shallow pullback before looking to enter long trading positions.

Whilst there are still plenty of problems plaguing major economies, we must remember that markets don’t wait for the economy to bottom before they start moving higher as they are forward looking. They always have a tendency to climb the wall of worry, so to speak. We’re not completely out of the woods yet but it does look like the path of least resistance is up in the short-term.

Ben Potter
Market Strategist
IG Markets


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