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Investors await outcome of key announcements

10.15 AEST, Monday 27 August 2012

Investors await outcome of key announcements
By Ric Spooner (Chief Market Analyst, CMC Markets)

As the reporting season draws to a close, Australian investors are likely to pause awaiting the outcome of a number of significant macro announcements due in coming weeks.

One of these will be any announcement on the nature and timing of further monetary stimulus by the US Federal Reserve. Markets have rallied in anticipation of action by the Fed. Friday’s speech by Mr Bernanke may provide some insight into what form the stimulus will take. It is unlikely that this round of Fed action will have as much impact as the first two given that long term interest rates are already low and that there is already ample liquidity in the system. Even so markets are likely to be encouraged by any announcement that suggests a large program of mortgage backed asset purchases designed to push long term borrowing rates lower. There is also capacity for disappointment and a buy the rumour, sell the fact reaction if it seems likely that the next round of Fed easing will be reasonably moderate in scope.

Equity valuations have now also reached levels where investors may be wary of pushing prices too much higher before September’s three major announcements on the Euro situation. The German court decision on the constitutional validity of the Euro bailout funds; the ECB announcement on its Spanish bond buying program; and the report by international creditors on Greece’s fiscal progress all loom as significant risk events.

If we get through September with a positive outcome on Europe and another significant Fed easing, there is definite scope for further boosts to market confidence and valuations notwithstanding the outlook for sluggish economic growth and a relatively difficult demand environment for many industries.

The chart of the S&P/ASX 200 index confirms the significance of September’s Euro and Fed announcements. A clear break above the zone of resistance is at around 4417/4448 would be significant. This is the level that stopped the market in both May this year and October last year. If the market starts to get nervous it may test near term support at around 4260/4280. However it would take a break below the 200 day moving average currently around 4212 to indicate that the levels of pessimism seen in May/June this year were returning.

Early price action in currency markets suggested a positive reaction to China’s Premier Wen’s statement urging measures to promote export growth. However, investors will be wary of getting too positive about this. At the end of the day export growth depends on demand from international customers. China’s large exposure to the export sector means that its growth rate will be hampered in the short run by difficult conditions in Europe and the US.

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