The ASX 200 fails to hold 5500

After Monday’s spike in implied volatility, a certain calm has descended on global markets and there seems to be a growing and potentially misplaced sense that the rest of the world should see a positive outcome from the Greek referendum.

Source: Bloomber

Certainly, the various polls are suggesting the ’yes’ camp has the upper hand, although this stance could still lead to increased uncertainty and the bookies subsequently expect Alexis Tsipras to step down on this development.

On a ‘no’ vote, reports that German Finance Minister Wolfgang Schäuble is prepared to work on a way of keeping Greece in the Union has been discussed. If this is the case, the balance of probability still suggests a messy but market-friendly outcome if Greece remains in the EMU.

Of course, if we see a ‘no’ vote with no immediate hope of a resolution then Asia should open on Monday in dramatic fashion, which could still happen as I think the markets are likely pricing in a 90% probability of a ‘yes’ vote.

Asian markets have taken heart today from various inputs, but the fact the S&P 500 managed a small bounce is positive, while European bond yield spreads (German bunds vs Italian debt) narrowed very slightly. Interestingly, the S&P 500 seems to be undergoing some signs of mean reversion after closing on Monday a whole three standard deviations from its 50-day moving average – something it hasn’t done since May 2012.

We saw a buy program running through the Australian equity market in the final hour of trade yesterday and this momentum has followed through today. The open gave traders a chance to assess sentiment as we knew the index was going to open weaker, so traders were keen to see if the early dip was bought; which it was.

Unfortunately, the bulls have forgotten the ASX 200 and SPI futures are in a fairly strong downtrend and we saw the rally capped at 5508, which is the five-day moving average and 38% retracement of the 5.5% sell-off seen during June. Generally, if a market is in a strong downtrend you will see moves capped initially at the five (and short-term) moving average.

On the downside, for this week anyhow, there have been strong bids coming into the market around 5,400. This is two standard deviations from the 50-day moving average (currently at 5666), which is also a level I would be keen to fade rallies to, given this has been a really good guide to sell into from around April.

Another saving grace for the bulls is the fact only 20.6% of companies are above their 20-day moving average, which over the last few years is a level thematic with a reasonable bounce in markets. Of course, on the other side of the coin it shows that the level of participation in the sell-off was broad-based.

Across the rest of Asia, price action has been much calmer than in prior days and this has also resulted in 0.3% move higher in S&P futures, meaning our European opening calls are also looking more constructive.

Japan has seen a seen a 9.3% increase in planned business spend, which is actually the highest level since 2007. The outlook from both manufacturers and the service industry improved (as seen in today’s TANKAN report) and this once again feeds into the idea that Japan is arguably one of the more attractive investment destinations around. If we look at the Nikkei / S&P 500 ratio (both markets converted to AUDs), we can see this ratio is now at the highest level since January 2014.

China is seeing less expansive ranges today as well, although we have seen follow-through buying, which is positive given the strong trend lower since the May highs. There are signs we may see stabilisation in the various mainland markets, with the index breaking above the five-day average. Still, it takes a brave soul to be long during this period of deleveraging at a retail level despite the barrage of market-friendly equity moves of late.

I would not be surprised to see another cut to the benchmark lending and deposit rate over the next few weeks. This view is premised on the fact that ‘real’ lending rates are still too high – recall one of the key issues at hand is to bring down borrowing costs.

Certainly, today’s June manufacturing PMI data at 50.2 won’t alter that view and we may see further easing after the Q2 GDP print on 15 July. For what it’s worth, the market is looking for 6.8% year-on-year growth at this print.

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