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.
Frequently Asked Questions about this Article…
A bull trap occurs when a market rally gives the impression of a new bull market beginning, but it is actually a temporary rise before the market continues to decline. Investors may be misled into buying, thinking the market is recovering.
Investors can look at broader economic data and market indicators. If the rally is accompanied by negative economic data or if safe haven assets like bonds and gold are falling, it might be a bull trap rather than a sustainable recovery.
Rising prices in industrial commodities such as oil and copper often indicate increased economic activity and can signal a positive market trend. However, if these rises are not supported by strong economic data, they may not indicate a sustainable market recovery.
Safe haven assets like bonds, gold, and the Japanese yen fell because investors were moving their money into riskier assets like shares, indicating a temporary shift in market sentiment towards optimism.
The ECB can influence market movements through its monetary policy decisions. For instance, if the ECB ramps up support, it can boost investor confidence and potentially stabilize or increase market prices.
CSL's report showed solid growth but fell short of some forecasts. Additionally, excluding expected losses from its recent acquisition could put pressure on its stock, potentially influencing the broader market due to its significant index weight.
Worse-than-expected trade and growth data from major economies like Japan and China can signal global economic challenges, potentially leading to market volatility and influencing investor sentiment negatively.
If key oil suppliers meet to discuss low oil prices, any agreement to cut production could lead to higher oil prices, which might stabilize or boost market prices by alleviating some economic pressures.
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