Weak US markets wrong foot local markets

Against a background of ongoing volatility and large market swings, investors are unsettled by the fact that US markets gave up early large gains to finish down last night. The Australian market, which staged a strong rally has potentially been wrong footed by this move, at least to begin with.

The positive announcement impact of China’s interest and reserve ratio cut proved to be short lived. In many senses this is a logical reaction. The latest rate cut is the fifth in a series of rate cuts that has seen rates fall from 6% to 4.6%. The general outlook is for this latest initiative to be another in a series of stimulus initiatives that have further to play out. In that sense the latest China’s latest cuts to interest rates and bank reserve ratios is not fresh news. Stimulus will help the economy but can be seen as only offsetting existing headwinds in the form of property and manufacturing oversupply as well as a debt overhang in some sectors of the economy. The lagged impact of stimulus may mean that it’s some time yet until China’s overall growth can be expected to improve.

The weakness in US stocks last night also hints that the fact that this downturn is about more than just a reassessment of China’s growth outlook. It’s now some time since the US stock market has had a major correction. This makes it vulnerable to volatility once some large moves have started and markets are concerned that it could take some time for things to settle down.

Today will be one of those trading days when large moves in either direction are a real possibility. China’s mainland stock market behaviour and today’s Construction Work Done report are on the trader’s watch list. The construction report will provide insight into Australia’s second quarter GDP with analysts hoping the non-residential and engineering sectors will not prove too much of a drag on residential building.

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