So the pullback that everyone has been calling for looks to be upon us, both locally and globally. While markets hardly needed a catalyst given the extraordinary performance of the last six to eight months, and most recently since the mid-November lows, it seems the upcoming sequester in the US and the Italian election turmoil will ensure uncertainty reigns supreme for at least the next few weeks.
Currently, the deadlocked Italian election seems to be the more worrying event as the prospect of a hung parliament has seen the benchmark stock index there fall almost 5 per cent and a big jump in Italian bond yields.
The above chart shows the recent spike in Italian and Spanish bond yield spreads over German bunds. Spreads had been falling for the best part of eight months as investors became less risk averse and more comfortable that the situation in Europe was finally under control. The decline in spreads has correlated near perfectly with the big rally in global sharemarkets, too.
However, the 39 per cent and 19 per cent jump in Italian and Spanish spreads respectively has reignited nervousness, which is finding its way through to markets.
The chart above shows the Euro Stoxx 50, S&P 500, S&P/ASX 200 and MSCI World indices and how they have performed over the last year. While it’s interesting to note that the Australian market has doubled its closest rival in terms of performance, of more interest is the most recent pullbacks.
Unsurprisingly, the Euro Stoxx 50 index is leading the way lower, currently down 6.5 per cent from its high. The next worse is the MSCI World Index, down 2.4 per cent while the S&P 500 and S&P/ASX 200 have retreated 2.2 per cent and 1.2 per cent respectively. Hardly a pullback some might say for the latter indices.
The relatively minor decline in the S&P/ASX 200 index is due to the amount of buying we’ve seen on the dips.
As can be seen in the above hourly chart of the S&P/ASX 200 index, with the exception of last Thursday, every time the market has opened significantly lower the buyers have stepped in and deployed capital in the high yielding, blue-chip names.
The 4980 intraday support level labelled also looks to be an area of significant buying interest as the market bounced from there on two occasions. At the moment, the local index looks trapped in a range bound by the red downtrend line, which shows lower highs and the support through the 4980 to 5000 level.
Judging by the concerns in the market, I think it’s likely we’ll see another test of the 4980 level and quite possibly further downside towards 4850 to 4900. A retreat to 4850 would mark a 5 per cent pullback, which is my most bearish scenario as the recent willingness of buyers to step in will put a natural floor under the market. If we're lucky, 4850 would be a great entry point into the market.
In terms of the medium to longer term outlook, I remain firmly in the bullish camp due to the demand-supply equation that firmly favours the bulls.
The attached video is a recent interview with two market experts on their outlooks for the remainder of 2013.
MARKETS SPECTATOR: Comparing pullbacks
International events have put pullbacks in motion here and overseas, setting the state for a large range of corrections.
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