Will the announcement impact of China stimulus be short lived?

The immediate question for traders this morning is whether the weekend news of additional stimulus initiatives in China will help offset the negative impact of growing concerns over Greece and signs of improving inflation in the US.

The immediate question for traders this morning is whether the weekend news of additional stimulus initiatives in China will help offset the negative impact of growing concerns over Greece and signs of improving inflation in the US.

The weekend news of a 1% cut in the reserve ratio requirement for China’s banks indicates that stimulus moves in China are becoming more aggressive and more frequent. The 1% cut is larger than most expected and may have a positive announcement effect as markets welcome the clear intent of Chinese authorities to prevent economic growth softening too much. However, when the dust settles investor reaction may be limited as they weigh concerns about the state of the underlying economy that has led authorities to this more aggressive action. The relatively muted reaction of the Aussie dollar to China’s stimulus news may be an insight into cautious stock market reaction.

The situation with Greece and EU now looks as though it will see risk premium built into world markets unless and until there is any firm announcement that Greece will be able to meet its debt obligations in May

Friday’s inflation data was a step in the right direction for the Fed. While more confirmation will be required, it’s starting to look like underlying inflation is on a path back towards the Fed’s target. This could see inflation removed as a constraint on Fed tightening and allow it to concentrate on economic growth and the labour market.

Technical traders will now be looking for clues on whether recent market weakness is just another downdraft in the broad sideways move we have seen since the first 6000 peak in the ASX index in early March, or whether we are in the process of beginning a more significant downward correction. A clear breach of the 5828 low made two weeks ago could be an early sign of weakness. However the 38.2% Fibonacci retracement and last August’s peak represent more significant support between 5680 and 5720. A breach of this level which is about 3.5% below Friday’s close would be more significant, possibly suggesting a third Greek crisis is about to be inflicted on markets.

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