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European hopes for a firm day on the Australian market

09.32 AEST, Tuesday 7 August 2012

European hopes set the tone for a firm day on the Australian market

By Ric Spooner (Chief Market Analyst, CMC Markets)

International markets are becoming encouraged by signs that ECB President, Mario Draghi’s leadership role in Europe may pay dividends. Germany’s statement that it supports plans to buy bonds suggests it is prepared to fall in behind the ECB on this issue. This increases the potential for high short term borrowing costs in Europe to be removed as a source of short term concern for international finance markets.

Although there are growing signs that there may be agreement in principle, much will depend on the actual terms of any bond buying arrangement put in place. This remaining uncertainty is reflected in risk markets failure to move decisively past the highs of recent days. Investors may need more detail on the European arrangements or good news on major economies to push prices higher. The S&P/ASX 200 index may reflect this sentiment today, lacking the conviction to push conclusively past recent highs at 4288.

Today’s RBA statement is unlikely to influence the market. Given recent better than expected data on the Australian economy and the possibility of improvement in the European situation, the RBA seems likely to maintain the broadly neutral stance on rates adopted at last month’s meeting.

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