ASX 200 News Today: Iran Tensions Drive Volatility as Investors Shift to Defensive Sectors

The S&P/ASX 200 Index had volatile day as global inflation and geopolitical tensions continued to play out. The index struggled to maintain its early gains and ended marginally down as investors took a defensive stance. Oil prices and the US-Israeli confrontation with Iran are now influencing global and domestic expectations and are likely to continue to cause short-term market uncertainty.

Global Inflation Shock and Growth Risks

Energy prices are once again sending a shock wave through global markets. The OECD said sustained oil supply disruptions could lead to higher inflation in developed economies. This year’s rapid rise in oil prices has already led to downward revisions in growth forecasts in Europe and Asia. Increasing oil prices are flowing through to transport, food and manufacturing costs, driving inflation.

Higher oil prices and interest rates are likely to slow growth into 2016 and beyond. Inflation is expected to remain high which may require central banks to keep policy tight. This presents challenging environment of slowing growth and higher inflation which is not good for equity markets.

ASX 200 Performance and Sector Rotation

The ASX 200 was unable to build on a strong lead from Wall Street and ended the day marginally down. The decline was focused on growth stocks. The biggest losers were technology, gold and communication services. Real estate and materials also retreated as investors locked in profits. This suggests a defensive rotation in response to macro uncertainty.

On the other hand, defensive and energy related sectors performed well. Oil prices improved the outlook for energy stocks. Healthcare and utilities also performed well, suggesting a defensive shift. Banks and consumer staples were relatively unchanged, implying that investors are not taking a full flight to safety.

The chart below shows that almost all major sectors face strong bearish pressure after the US-Iran war, with the Gold and Materials Index posting the biggest drop. Only the Energy Index has recovered since the war began, which has offset the negative momentum in other sectors.

Technical Analysis – Consolidation After Drop

The daily chart below shows that the ASX 200 did not move much on Thursday, as the price is consolidating after the strong drop. However, a recovery above 8,700 is required to indicate further upside.

On the other hand, the weekly chart below shows that a weekly close above 8,500 will produce a bullish hammer, which will indicate further upside next week, as the price will maintain the black dotted line on the chart. On the other hand, a weekly close below 8,300 will be a negative for next week.

Until the price recovers above 8,700 and starts closing above the 9,000 level, the short-term trend is still uncertain, as the index remains below the moving averages.

Ongoing uncertainty from the US–Iran war is still driving equities. Prices will move with news headlines; therefore, extreme volatility is expected. During periods of heavy volatility, fake moves are normal.

Bottom Line

The ASX 200 continues to struggle with higher oil prices and geopolitical tensions. Growth is slowing and inflation is increasing. The sector rotation suggests move to defensive sectors and away from growth. The technicals are also defensive with resistance levels intact. In the short term, market is likely to remain volatile and sensitive to news while a more sustained recovery will depend on break above key resistance levels.