Stan Shamu for Chris Weston, Chief Market Strategist at IG Markets
ASX 200 trades at four-week highs
Equities have picked up where they left off on Friday with a rally across the region. The ASX 200 has been a standout after weeks of underperformance. The return to strength of the energy space has driven the gains as investors speculate on crude oil prices. After seeing a rebound on Friday, many have been calling a bottom in oil prices and feel this is a beginning of a recovery. With Saudi Arabia pledging its commitment to seeing stability in oil prices, many took this as a catalyst for a recovery. Smaller producers outside OPEC have been blamed for the instability in prices. However, the problems oil is facing certainly seem deeper than that and I suspect we haven’t put the recent volatility behind us just yet. For now though, the recovery in oil has been timely and underperforming energy names such as Santos and Oil Search have been bid significantly higher.
The volume in the market has been fairly decent as well and investors who would have stuck around are likely to be rewarded as this rally seems to have some legs. It’s not only the energy plays enjoying the buying, recently underperforming iron ore plays are also being bid higher with Fortescue Metals being a preferred destination. The stock is on track to close above a downtrend which has been in place since July. Iron ore has also rebounded and this is dragging smaller iron ore plays higher as well. However, iron ore futures are still choppy in Asia suggesting the move is not stable just yet. A concern remains the retail space where domestic demand remains benign. With Kathmandu issuing a profit warning today and economists tipping a not so impressive festive shopping period, it’s definitely make or break time for several retailers. In sharp contrast, the UK and US for example have recorded a significant spike in sales this festive period. For the overall market, the ASX 200 has now retraced around 61.8% of the drop from November highs around 5550 to December lows around 5142. This has all happened over the last four sessions and given we are only around 2.5% from that mark then there is a strong possibility we can still close that space.
AUD and euro under pressure
The economic calendar has been extremely quiet in Asia today but we have a bit of activity to look out for from China at 1730. China will release November commodity and energy trade data. This will be interesting given the recent moves in energy prices. Additionally, given China is a significant trading partner for us in commodities then naturally this carries weight. As far as AUD/USD is concerned, we have seen a minor pop in the pair to around 0.8160. There is a downtrend resistance line that kicks in around $0.8200 and I feel sellers will be eyeing that level in the near term.
Ahead of European trade, we are calling the major bourses firmer mildly firmer with some choppy price action likely. There isn’t a lot going on in the calendar at all this week given it’s a shortened trading week. Weakness in the single currency seems to be returning to the fore and EUR/USD is just hanging on to $1.2200 at the moment. The main event for Europe this week will be Greece’s second attempt to elect a president, failure to do so could see pressure mount on the single currency. EUR/USD is already trading at its lowest since July 2012 and traders will be looking to take advantage of the downward momentum.