Bull or bear trap

The two day rally in shares and other risk assets presents a conundrum – is it a bull trap or the beginning of a new bull market that will kill bears? The market action is unambiguous. Important industrial commodities oil and copper rose with shares, and safe haven assets such as bonds, gold and the Japanese yen fell sharply. The key question is whether markets have reached a turning point, or is this merely a pause in a period of value destruction?

Further complicating matters is the data accompanying the rally. Company reports in the US and Australia are broadly supportive, but trade and growth data from Japan and China released yesterday was worse than expected. On the positive side, the ECB appears set to ramp up support following President Draghi’s comments overnight and there are signs key oil suppliers may meet in Doha later in the week to discuss low oil prices. While neither of these moves are clean good news, they may have acted as a circuit breaker for falling prices that had sparked selling.

CSL’s report may disappoint investors today. First half growth of 3.8% is solid in the current low-growth environment, but less than some forecasts. Additionally, CSL re-affirmed guidance but is excluding an expected loss from recently acquired vaccine manufacturer Novartis from the estimates. These factors may see CSL under pressure at the open, and given it comprises almost 4% of the index, may influence the direction of trade.