Australia Caps Longest Stock Rally Since '04 on Rate Cuts, China
Comment of the Day

January 29 2013

Commentary by Eoin Treacy

Australia Caps Longest Stock Rally Since '04 on Rate Cuts, China

This article by Adam Haigh for Bloomberg may be of interest to subscribers. Here is a section
Investors are moving into equities as the Reserve Bank of Australia undertakes the most aggressive interest-rate cuts among advanced economies, sapping the allure of bonds as yields decline. The S&P/ASX 200's forecast dividend yield of 4.5 is the highest among the world's 10 largest equity markets, according to data compiled by Bloomberg.

“Lower interest rates contributed to strong gains in the banking sector and the improved China outlook supported demand for Australian resources,” Keith Poore, the Wellington-based head of investment strategy at AMP Capital, which has about $126 billion in assets under management, said in a phone interview yesterday. “We didn't think there was going to be a hard landing in China and that seems to have been the case. This year will be more about how fast the recovery is in China.”

Eoin Treacy's view The RBA Cash Rate Target has returned to 3% which is where it bottomed in 2009 following aggressive intervention during the credit crisis. If one were only to assess the strength of the Australian economy, and the rebound in China's market it is arguable whether additional cuts are warranted. However, when one considers Japanese efforts to weaken their currency the argument takes on a different complexion.

By aggressively lowering interest rates, the RBA has succeeded in keeping the Australian Dollar largely rangebound, below $1.06 against the US Dollar since August. It remains too strong for comfort from the perspective of the domestic economy and has held an upward bias within this congestion area. It found support today in the region of $1.04 and a sustained move below that level will be required to question potential for continued higher to lateral ranging.

As with stock markets globally, the S&P/ASX200 has rallied impressively from its November lows. However, it is becoming increasingly overbought as it approaches the psychological 5000 area. A reversion towards the mean is increasingly likely but a sustained move below the 200-day MA, currently near 4500 would be required to begin to question medium-term upside potential.

Australia is another market where the outperformance of the banking sector is a bullish factor. ANZ Banking Group consolidated above its five-year range from late August, and reasserted the medium-term uptrend at the end of December. A sustained move below A$24 would now be required to question medium-term scope for additional upside. Westpac Banking Corp has a similar pattern. Commonwealth Bank of Australia broke out to new all-time highs in December and continues to extend its advance. While increasingly overbought a sustained move below the 200-day MA would be required to question medium-term scope for further upside. National Australia Bank exhibits a rounding characteristic within its base consistent with accumulation.

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