The Australian market is likely to open cautiously as investors wait on the outcome of major news events this week. These include the Australian CPI data on Wednesday as well as the Bank of Japan meeting and the release of European bank stress test results both due on Friday.
Many stocks in the ASX 200 index will be supported by a positive lead from US stocks on Friday and by low interest rates locally. The Australian 10 year bond yield is trading at around 1.91% this morning as with markets anticipating further rate cuts by the RBA.
However, the materials and energy sectors are likely to weigh on the overall ASX 200 this morning. Weaker iron ore, copper and oil prices on Friday will dampen enthusiasm for these sectors
Friday’s release of Markit’s Flash PMI indices for July provides some early comfort that the global impact of the Brexit vote maybe reasonably limited at this stage. In fact, the US flash manufacturing PMI rose quite strongly to 52.9 from 51.3 the previous month. Encouragingly it included a lift in new orders sub index. If other US economic data for July follows this trend, markets may begin to bring forward their expectations on the timing of the next Fed rate hike. This thinking was reflected in a stronger $US
It was also encouraging to see only a marginal decline in Europe’s composite flash PMI during July indicating little immediate impact from the Brexit vote. The Markit Flash PMI suggests that the Brexit vote’s biggest initial impact will be on the UK economy itself with the Composite PMI for July falling from 52.4 to 47.7 and dragged down by a weak service sector reflecting caution on future investment plans.
Woolworth’s announcement of more impairment charges provides further insight into its recovery strategy. The move signals increased focus on sales per square metre and return on funds employed and is reflected in plans to slow new store growth while closing underperforming stores. A key issue for investors will be whether this is enough to avoid future capital raisings or dividend reductions