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.

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 Market response to the weekend rate cut may also be superseded by announcements on major initiatives arising from this week’s Plenum.

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