Market expected to open slightly stronger

09.36 AEST, Tuesday 5 June 2012

Market expected to open slightly stronger

By Ric Spooner (Chief Market Analyst, CMC Markets)

The Australian market is expected to open slightly stronger in quiet trading this morning

International risk markets generally held the line last night and our market is likely to do the same prior to this afternoon’s RBA announcement.

There was a pause in Euro related selling last night. Markets were encouraged by the news that the ECB did not intervene to buy Eurozone bonds last week. If Spanish bond yields were being held at current levels by direct ECB intervention it would have indicated that the bond markets were even more concerned about Spain than current yields imply.

Australian investors will focus on the RBA rate decision this afternoon. If there is no rate cut we may see a minor sell off although this is likely to be tempered by the expectation that the Reserve will cut if conditions continue to deteriorate in coming months.

If there is a rate cut today, it is likely to move us into the mid stages of the current rate cutting cycle where monetary easing typically becomes more supportive for share market valuations. Investors may not yet be too enthusiastic about the impact of rate cuts on company revenues given the entrenched savings ethic currently gripping consumers. However, falling cash and fixed interest rates are beginning to pose a dilemma for investors. The opportunity cost of being in cash and the risks of buying bonds at current low rates will command increasing attention from investors considering reducing exposure to shares.

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