Macro data supports markets while investors ponder potential China Free Trade Agreement winners

US markets again defied local nervousness on Friday, holding steady at the end of a week in which the ASX 200 fell 1.7%. The firm US lead, broadly solid economic releases and some strength in commodity prices should see a steady open to the Australian market this morning.

The recent recovery in stock market valuations, means investors are now finding it difficult to locate value and are concerned that he market is again vulnerable to a corrective sell-off making buyers cautious.

Friday’s international news was generally supportive for markets, particularly in the US where retail sales continued at the sort of rate that should drive ongoing economy growth.  Europe’s 0.2% GDP last quarter was, on the other hand hardly stellar but proved a relief for traders in that it was a little above expectation. In China, however, increasing bad debts and lower than expected credit growth sounded a note of caution as nervous borrowers continue to offset stimulus initiatives elsewhere in the economy.

Today’s news of the Free Trade Agreement with China will have investors thinking about companies that may benefit from these initiatives. Possible beneficiaries in the services sector might include a wide range of companies varying from tourist and hospital operators to fund managers.  The devil will be in the detail however and, in most cases, a lot of work will be required to convert theoretical opportunity to bankable results. Fund managers, for example are likely to be asking for changes to withholding tax arrangements to allow them to capitalise on the opportunity to manage funds for international clients.

Gold stocks may find some support this morning after Friday’s sharp jump in prices.  The rally in gold appears to be technical in nature with sellers scrambling to cover positions after the market found a base around $1130. Friday’s rally in the Eurodollar, following better than expected GDP figures also supported gold. However, gold is now back to the resistance of the old $1180/$1200 support zone.

The ASX 200 index has returned to the potential support zone of its 200 moving average and the 38.2% retracement between 5445 and 5385. However, with valuations relatively full and a question mark continuing to hang over major commodity markets, investors may need fresh reasons to buy strongly at current levels. 

For further comment from Ric Spooner please call 02 8221 2137.