Response to weekend news of China's rate cut will be the key to the market's opening tone this morning

News of China’ rate cut should help buyer mood this morning, compensating for a weak lead from the US market. However, while news of lower borrowing costs will help support equity valuations and be seen as a positive for commodity demand, market response may be limited. In some senses this rate cut is a technical response to the fact that lower inflation is making real borrowing costs more expensive in China. Declining inflation rates are partly attributable to China’s stronger currency which is reducing the cost of imports. The relatively subdued reaction of the Aussie and Kiwi Dollars to news of China’s rate cut this morning may point to a similar response by the stock market.

The Australian stock market has come through the February reporting season in relatively good shape. The Australia 200 index rose 6% during the month with around two thirds of companies achieving profit growth over the year. An ongoing focus on cost cutting and capital management is a strategic feature for companies at the moment. This is contributing to the lower inflation and moderate growth environment that’s keeping a lid on consumer spending.

After strong gains in the first half of February, the ASX 200 index struggled to make further headway over the past two weeks. From a technical point of view, the choppy, low momentum behaviour of the last fortnight indicates that a correction is in the wind. This correction could take the form of either a pull back or, more sideways, choppy trading. The 20-day moving average now provides support for the index at around 5840 and a clear break below this would suggest that any correction is likely to take the form of a pullback rather than a consolidation.