IG Markets: Notes on Australian markets today

Kyle Rodda, Market Analyst, Australia

The day's key takeaways:

- ASX rallies, as decreased US/Iran tension supports market sentiment

- Trend for the ASX200 pointed higher, but valuations looking rich again

- Aussie Dollar looks to continue downtrend, as markets bet on RBA cuts

The run down:

The quietening down of news relating to US and Iran tensions has stoked risk appetite today, and given the ASX200 an excuse to test fresh record highs, once again. As of 3PM this afternoon, the intraday high has been 6889 – 9 points shy of November’s all time high – with the market currently up 0.6% for the session. The gains have been underpinned by what’s been quite a broad-based rally, with market breadth at a solid 80%, and every sector, barring in the energy sector, which has followed oil prices lower, in the green. A slightly heightened appetite for growth and risk has seen the health care and IT sector lead the gains on a relative basis. The health care sector has added 10 points to the index, while the financials have added 6 points, and the materials space has added 7 points.

One can’t be blamed for feeling a bit of a sense of déjà vu today. It’s the fourth time in 6 months, or so, that the ASX200 has made a charge higher towards the 6900-mark, only to bow down before the milestone and pullback. It would seem the level is quite a strong area of resistance for market participants at present, and a point which represents close to the top-end of “fair value” for Aussie equities right now. The notion is backed up by some more fundamental measures of the stock market’s strength. Once again, valuations look rather stretched up here, with forward earnings looking as rich they’ve been (again) for this decade. Certainly, this isn’t to suggest that fresh record highs won’t soon fall: momentum and the overall trend is still pointing to the upside. But it may be that gains for the ASX200 will be a grind from here – and at that, relatively underwhelming when compared to other major global indices.

The Aussie Dollar was in focus today, with trade balance data released, and revealing Australia’s trade surplus expanded to a better than forecast $5.8 billion last month. The AUD/USD seemed pretty unperturbed by the news, with the pair only edging slightly higher during Asian trade, mostly virtue of lower global geopolitical risks. The AUD/USD has found itself in an interesting spot this week. Having broken through resistance at its 200-day EMA, the AUD/USD has plunged back below that mark, as traders increase bets that soft Aussie fundamentals will force the RBA to cut interest rates as soon as next month. It’s very early in 2020 to be making grand calls, but the AUD could prove itself a relative underperformer in the G10 space, even despite what’s looking like an increasingly vulnerable USD. Domestic weakness could trump a stronger global growth narrative for the AUD/USD, as the pair continues to trade on unfavourable yield differentials, over and above better market sentiment and improving commodity prices.