By Ric Spooner (Chief Market Analyst, CMC Markets)
The S&P/ASX 200 index is set to open moderately higher this morning after yesterday’s 1.85% gain. Investors will be encouraged by large gains in US and European markets last night. However, buying may be tempered by the fact that the Australian market rallied prior to US markets with the index rising 1.85% yesterday.
International investors were encouraged by strong holiday retail sales in the US and reports of plans for further integration of European fiscal powers backed by arrangements for the European Stability Fund to increase its capacity to contain risk by insuring national bonds. As has been often demonstrated in recent months the stakes are high in markets at the moment. The upside for share market valuations is very large if a credible solution to the European crisis can be put in place. Even so, after many false starts investors are likely to limit buying until they see formal announcements with a credible chance of being passed into law.
Australian markets today will also focus on the contents of the government’s mid-term economic review due for release at 11am this morning. The government’s intention to cut spending in order to maintain its 2013 surplus forecast has been well flagged. However, a key focus for investors will be whether the extent and nature of the budget tightening measures are sufficient to allow room for additional rate cuts by the Reserve Bank. This would be seen as an overall positive for the economy given that rate cuts and the associated easing in the currency are likely to impact weaker areas of the two speed economy. However, more moderate cuts may be seen as an overall negative for medium term economic growth if the extent of fiscal tightening is insufficient to make room for compensating rate cuts over and above what is already likely.
S&P/ASX 200 support and resistance
Resistance: 4122- 4140
Support: 4075 – 4060