S&P/ASX 200 Fundamental Analysis – September 7, 2016 Forecast

The S&P/ASX 200 Index looked promising early in the session on Tuesday, but at the end of the session, it ended lower. The index finished at 5413.60, down 16 points or 0.29 percent. The inability to sustain the early rally suggests that buyers are scarce.

Sellers eventually took control after the Reserve Bank of Australia left the cash rate at 1.5 percent and maintained a neutral bias. Additionally, it added language to its monetary policy statement that said Australian Dollar strength could hinder domestic strength.

“Having eased monetary policy at its May and August meetings, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time,” outgoing Governor Glenn Stevens said in a statement.

The GDP was expected to arrive at 0.6% but the actual was only 0.5%. The actual for the previous month was also revised down to 1%.

Westpac raised its forecast from 0.4 to 0.5 percent quarterly growth. This is below the consensus estimate of 0.6 percent. It is also predicting 3.3 percent annual growth. They cite a 2.7 percent jump in public sector fiscal spending as the reason for being slightly more optimistic. However, this increase is only likely to offset slack domestic demand, which is growing at just 0.9 percent.

The price action suggests that investors were disappointed with the RBA’s decision to keep the cash rate on hold at a record low 1.5 percent. They were hoping for clarity on the bank’s rate plans. There was essentially no new information from the August meeting’s commentary. Overall, the RBA’s September statement indicates there won’t be a cut in October, but that it still believes an appreciation in the Australian Dollar could cause problems for the economy if it hurts exports.

FORECAST

Today’s price action and direction will be determined by the quarterly GDP report. This report has been known to produce volatile results so investors should prepare for a possible two-sided reaction. Traders need to remember that in Q2, markets were preparing for the Brexit vote, which may have involved some portfolio position-squaring by money managers looking to reduce risk. Additionally, the RBA had cut rates in May, delivering capital gains for investors.

Try not to look too much into this report for long-term indications because of the aforementioned variables. Treat this report with caution since it is only one quarter of data. Therefore, we’re not going to read into the data too much at this time. Basically, we expect stocks to firm if the GDP number reaches or exceeds the 0.6 percent consensus estimate. The S&P/ASX 200 Index is likely to break sharply if the report comes in under 0.4 percent.