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Momentum the key

With the ASX 200 finally out of its trading range, the question for traders will be whether the buying momentum of recent days will continue today.

This morning’s solid open now puts the ASX 200 comfortably clear of the trading range that had restricted it since June. The next test for the index will be whether it can resume its longer term up trend by exceeding the May peak at 5956. Amongst other things, this may depend on investors being prepared to rerate major Australian stocks to the sort of above average valuations that have been applied to the US and other markets.

Certainly the performance of base metals markets over night suggests evidence of animal spirits that could support the local market this morning. Strong performance by the metals complex, especially copper, indicates markets are confident about the prospects for demand growth.

However, China’s iron ore and steel futures introduce an element of caution for buyers. While the spot iron ore price edged higher again, the Chinese futures markets were weaker. This raises a question about the durability of the bounce in iron ore following release of China’s strong import data last week.

Investors have been prepared to look through the second downgrade in Rio Tinto’s copper guidance this year in an otherwise solid production report. Rio has the market’s confidence given its strong efficiency record in recent times and the key focus for investors the outlook for the iron ore price.

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