FYI | Jul 06 2012
By Peter Switzer, Switzer Super Report
Two weeks ago I irreverently suggested, with apologies to Kath & Kim, that “I could feel it in me waters” that stocks could be heading up. It was ahead of the EU summit and the charts were pointing to the possibility, but now the question is can it keep going?
Europe on track
Since the summit, which saw the EU leaders provide more support to European banks and opt for growth at the expense of severe austerity, stocks have headed up. In fact, the Stoxx Europe 600 Index was up 5.2% in three days, but more importantly, it could end this week higher for the fifth week in a row!
Of course, Europe’s indexes have been helped by the Greek election, the Spanish bank bailout and the summit. And Thursday there is an expectation that the European Central Bank will cut interest rates by 0.25%. [Which it did – Ed]
A Bloomberg survey of 62 economists found that 11 saw no cut, 46 predicted a 0.25 basis point reduction, while five expected a 0.5 basis point drop. A cut would certainly add to the positives and would keep the momentum going on EU markets.
US economy
In the US, the jobs report comes out on Friday and there is no expectation of great news with only 90,000 jobs tipped to have been created in June. However, that would be miles better than the 69,000 that showed up in May.
These jobs numbers could be a market mood maker ahead of the next reporting season, which kicks off next week with Alcoa first out of the blocks.
Right now the US economy is slowing, but the news is mixed. Just this week manufacturing shrank in June for the first time since July 2009, but then one day later we found that factory orders rose in May.
Manufacturing out of China is weaker than expected, but then the Chinese authorities are now easing monetary policy. At the same time, US investors are still hopeful that the US Federal Reserve will invoke a third quantitative easing stimulus package (QE3) if the economy does not pick up soon – the job numbers will bring this issue into play later this week.
At home
Locally, our economy is starting to show some positive signs that the 1.25% rate cuts since October last year and the Federal Budget pre-carbon tax handouts have started to have some impact on the economy.
This week building approvals surged 27.3% for May, capital city house prices rose 1% in June and retail trade was up a bigger than expected 0.5% in May. Meanwhile, the TD Securities Inflation gauge indicates inflation remains at a low 1.6%.
CommSec thinks one more rate cut will happen in August, but if stocks head higher, I suspect the Reserve Bank of Australia (RBA) will keep its powder dry until something goes wrong in Europe. If it doesn’t and the US economy looks better in coming months, thanks to say lower gasoline prices and a less scary Europe or better than expected company reporting, then stocks could keep trending higher.
This would be helped by China showing some positive signs, though that could take three months.
My view is that the muddling through process is speeding up, though it could hit a few road bumps in coming months. But I maintain faith in an end-of-year rally, especially after the US election, and this could usher in the end of the secular bear market that started in November 2007 with the Global Financial Crisis.
Put it down to my economic and market judgment and, of course, ‘me waters’!
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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