Risk on but bank reporting season and soft commodities introduce a note of caution
The ASX 200 index broke clearly above resistance on Friday, meaning that many buyers will now see a significantly improved probability of a strong finish to the year. This is likely to drive a buy dips mentality for some time to come.
However, at this early stage, today’s open is a bit more sedate than some may have expected.
The fact that all four major banks have now lifted rates is a positive for the sector. However, the market may become cautious on the sector leading into release of ANZ and NAB’s profit results this week. With future margins being assisted by higher mortgage rates the focus is likely to be on cost control and bad debts.
The materials and energy sectors continue to be supported by merger and acquisition activity. However, the fact that commodity prices are not participating in the current “risk on” move is a limiting factor.
China’s rate cut is another step in what’s expected to be an ongoing series of stimulus initiatives. It’s now been about a year since the first rate cut so we are at a stage of the cycle where stimulus will be flowing through to the broader economy. China’s short term economic outlook is helped by the fact that authorities are giving weight to economic support in the trade off with longer term reform. However, markets are unlikely to see this as a silver bullet given the reduced appetite for debt and the fact that official rate cuts tend to have most impact for State Owned Enterprises. Market response to the weekend rate cut may also be superseded by announcements on major initiatives arising from this week’s Plenum.
Frequently Asked Questions about this Article…
When the ASX 200 index breaks above resistance, it indicates that the index has surpassed a previous high point that was difficult to overcome. This can signal a positive trend, encouraging investors to adopt a 'buy the dips' mentality, anticipating a strong finish to the year.
All four major banks in Australia have lifted rates, which is seen as a positive for the sector. However, investors are cautious as they await the profit results from ANZ and NAB, focusing on cost control and bad debts amidst higher mortgage rates.
The materials and energy sectors are being bolstered by merger and acquisition activity. However, the lack of participation from commodity prices in the current 'risk on' move is limiting the sectors' potential gains.
China's rate cut is part of a series of stimulus initiatives aimed at boosting the economy. While it supports short-term economic growth, especially for State Owned Enterprises, it is not seen as a comprehensive solution due to reduced appetite for debt and the focus on economic support over long-term reform.
The market's response to China's rate cut might be tempered by upcoming announcements from this week's Plenum, which could introduce major initiatives that overshadow the rate cut's impact.
Investors should pay attention to cost control and bad debts in the upcoming profit results from ANZ and NAB, as these factors will be crucial in determining future margins amidst higher mortgage rates.
Despite a 'risk on' sentiment, caution persists due to the upcoming bank reporting season and the lack of commodity price participation, which could limit the overall market's upward momentum.
China's economic support measures, including rate cuts, are significant as they aim to stimulate the broader economy. However, their effectiveness is limited by a reduced appetite for debt and the primary impact being on State Owned Enterprises rather than the entire market.
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