Australian market likely to hold the line in quiet trading

09.45 AEST, Tuesday 3 July 2012

Australian market likely to hold the line in quiet trading

By Ric Spooner (Chief Market Analyst, CMC Markets)

World risk markets have held their ground since the weekend but failed to build on Friday’s strong moves.

This suggests that the initial impetus for Friday’s rally had a lot to do with short covering by traders positioned for a failure of the Euro Leader’s Summit. Spanish 10 year bond yields, which are one of the bell wether risk markets, are an example. Yields fell from 6.94% to 6.33% on Friday but were basically steady last night closing at around 6.37%.

The Australian share market is likely to reflect this tone today with a steady opening below technical resistance around 4160 on the S&P/ASX 200 index. Trading may be fairly subdued over the next couple of days with the RBA meeting unlikely to have much impact on investor sentiment and the US markets heading into Wednesday’s July 4 holiday.

Not surprisingly, manufacturing indices released yesterday around the world reflected soft conditions with most major indices coming in between 45 and 51. Markets have already positioned for deteriorating conditions in world economies throughout May and June as the European crisis weighed on consumer and business confidence.

Market direction from here is likely to depend on the extent to which confidence and economic activity levels are able to settle down and recover at least moderate momentum over the next couple of months.

Investors will be focussed on the possibility of an ECB rate cut on Thursday. Following on from the Leader’s summit this may be another step in lifting short term confidence out of recent “emergency settings” and providing a platform for some improvement in economic activity levels over coming months.

Provided investors see at least a reasonable chance that the broad principles announced by the Leader’s summit will be enacted over coming months, it is likely the rally that started on Friday will push beyond the initial short covering phase with new buyers extending the current rally and pushing the Australian market beyond immediate resistance levels around 4200.
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