By Chris Tedder
Price action in Asia has, yet again, been broadly sideways over the last week, but most markets have at least managed to push into the green, albeit only just. The ASX 200 and Hang Sang are up around 1.77% and 2.28% for the week, respectively. Whereas, the Nikkei has been hit harder by renewed concerns about the European crisis, poor earnings and a strong yen, and has fallen around 2.48% in the last 5 trading days, which means it is now one of the worst performing markets in Asia this year.
Last week global equity markets were being led forward by a slew of positive earnings reports out of the US, but without this investors are finding a reason to rally is eluding them. This sentiment is hitting the Nikkei 225 hard as Japanese exporters struggle with a strong yen and recent earnings weigh on stock prices. Japan is also struggling under the weight of an ageing economy and weak levels of global demand, thus the market is underperforming most of its counterparts in Asia.
Furthermore, renewed concerns about the Eurozone crisis are also putting a damper on sentiment in Asia. First it was the UK who entered a technical recession, then over the last week figures out of Spain indicated it is also in a double dip recession. Recent PMI figures, with the exception of Germany, are not painting a very healthy picture for the rest of 2012, and accordingly we are not very optimistic about stocks in the region. This may continue to weigh on stock prices in Asia as investor sentiment suffers.
However, there is a bright spot in recent manufacturing PMI data out of China, which printed at its highest level in more than year. When combined with the uptick in the official figure to just below 50 (which separates expansion and contraction) and the arsenal of tools that Beijing has to stimulate the economy, we expect growth in China to pick up from here, which should lift investor sentiment throughout Asia.
Nonetheless, the driver of risk sentiment this week, along with the European crisis, will likely be the non-farm payrolls report out of the US, as it is an indication of the health of the US labour market. And, given how dominant the US labour market has been over risk-sentiment this year, any significant surprise on the downside could prove very detrimental to global stock markets, and visa versa for a better than expected result.
The biggest market moving event in Australia over the last week was the RBA’s decision to cut interest rates by 50 bps. Thus far, it only provided a short-term boost to the ASX 200. Overall, the move by the reserve bank is positive for equities in Australia, however it raises the question: is the situation in Australia really that bad that it justifies a 50 bps rate cut in one month?
Historically, rates have only been trimmed by this magnitude when it is deemed to be an emergency. Right now, this is not the case in our opinion. Instead, this rate cut is the RBA all but admitting it should have cut rates in April, especially considering the neutral statement that accompanied the announcement. Hence, investors may have lost a little faith in the RBA but they are likely not overly concerned about the future of the Australia economy, which is underpinned by the RBA statement.
Overall, the positive flow-on from the move by the RBA should help lift sentiment in Australia. The ASX 200 managed to break through a resistance level around 4435 (high since August 2011), but the index failed to hold its ground above this level. This is an important psychological level, and a sustained break above this level may cause the index to break back above 4500 (i.e. its trading range before the mass risk sell-off in August 2011).
AUS200 – Daily