Share markets could be at risk of a correction in the short term.
Our market lost ground last week with the All Ords falling 0.7 per cent to 6273.3, thanks to big falls on Thursday and Friday.
There was definitely some profit taking about, even though many investors were obsessed with the multi-billion dollar float of Platinum Funds Management Group and the continuing rise in the Qantas share price.
Those traditional custodians of value, the banks, took a bit of a pounding last week and investors were certainly not focusing on the continuing weakness in the prices of copper and gold which have been big drivers of the resource sector.
In the US last week after seven straight weeks of rises, the Dow and the S&P 500 ended lower while the Nasdaq ended about square.
The Dow finished on 13,507.28 and lost around 0.4 per cent for the week; the S&P 500 index ended up on 1,515.73 and lost half a per cent over the week, while Nasdaq finished on 2,557.19 and closed just one point lower than the previous week.
Major markets overseas in the US and Britain are closed tonight for holidays so trading trends won’t emerge till the midweek.
The US will be dominated by economic news this week but after the past seven to eight weeks there might be a breather ahead for equities says Dr Shane Oliver, the AMP’s head of Strategy.
Here’s what he said in his weekly note on Friday:
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Shares ran very hard from the low in March and had become technically overbought and due for a correction, the sharp rise in bond yields and reduced confidence in US rate cuts are a negative and the surge in petrol prices is a threat to retailers’ profits.
However, absent a major geo-political shock such as a major conflict in the Middle East, a repeat of last year’s May to June fall which saw US shares come down by 8% and Australian shares fall 12%, is unlikely.
This is because the correction in February this year has already helped markets let off a bit of steam and the flow of money into markets is likely to remain strong, so downside should be limited to around another 3 or 4% this time.
Notwithstanding, the risk of a short term correction, the broad trend in share markets is likely to remain up.
Valuations are not particularly stretched, the global and Australian economies are in good shape and profit growth remains solid.
And we remain of the view that soft growth in the US will be met with lower interest rates later this year which will help support shares by pushing price to earnings (PE) multiples higher and the flow of funds into both global and Australian shares is likely to remain very strong. And finally we still haven’t seen the sort of investor euphoria that is normally seen around share market tops.
While many fret that a correction in Chinese shares could drag down global and Australian shares, our view is that any impact is likely to be short lived because a fall in Chinese shares is unlikely to have much impact on the Chinese economy.
This is because share ownership in China is still very low (less than 5% of the population owns shares), shares account for a very low proportion of household wealth, there has been little positive wealth affect on Chinese consumer spending as the share market rose so its hard to see much negative wealth affect, consumer spending is a relatively small proportion of Chinese GDP anyway and finally the equity market only accounts for around 10% of financing in China.
Bond yields may face a bit more upwards pressure in the short term, but with US growth likely to remain modest and inflation likely to remain benign they are likely to range trade over the remainder of the year.
The $A has been in correction mode over the last month, stuck in a range between $US0.8170 and $US0.8390. This is to be expected after the surge through $US0.80 in March.
Our view remains that the $A has more upside ahead of it, probably to the February 1989 high of $US0.8950, given the normal tendency of currencies to go to extremes.
