S&P/ASX 200 Fundamental Analysis – August 23, 2016 – Forecast

The S&P/ASX 200 Index drifted lower on Monday, finishing at 5515.10, down 11.60 or -0.21%. Most of the weakness was attributed to a general lack of demand for higher risk assets ahead of this week’s central bankers’ symposium in Jackson Hole, Wyoming. The keynote speech will be delivered by Fed Chair Janet Yellen on Friday.

As we near the end of summer, many major investors have become content with the direction of the global equity markets so we expect to see a drop off in volume and volatility unless there is a sudden news event.

Also contributing to the weakness in the S&P/ASX 200 index were losses in the gold, metals & mining and resources sectors. These sectors lost ground because of a stronger U.S. Dollar. The dollar was boosted by hawkish comments from a high ranking Fed official over the week-end.

On Sunday, U.S. Federal Reserve Vice Chairman Stanley Fischer said he saw reasons for a near-term interest rate hike. Mr. Fischer, the Fed’s second-highest ranking official, told a crowd in Aspen, Colorado, the central bank is close to hitting its targets for U.S. employment and inflation.

“Looking ahead, I expect GDP growth to pick up in coming quarters, as investment recovers from a surprisingly weak patch and the drag from past dollar appreciation diminishes,” he added.

Additionally, Fischer said that core inflation is “within hailing distance” of the Fed’s 2 percent target and that employment had increased “impressively” since its bottom in 2010.

His comments encouraged investors to sell dollar-denominated commodities including gold, which in turn put pressure on gold stocks. A 3 percent decline in crude oil futures also contributed to the weakness in the ASX 200.

As far as individual stocks are concerned, Fortescue Metals dropped 2.4 percent to $4.81 despite the iron ore miner more than tripling its annual profit and pumping up its dividend. The minor said cost and spending cuts have more than offset the drop in iron ore prices, helping profits soar to $US985 million after tax.

On Tuesday, traders will hear from Oil Search, Scentre Group and Healthscope on Tuesday and Westfarmers, Boral and Westfield on Wednesday.

Economic news is scarce this week so investors are likely to remain sensitive to any outside news especially if it effects metals and other natural resources. Early Tuesday, investors will get the opportunity to react to Conference Board’s Leading Index.

Low volume and thin trading conditions could lead to further pressure on the S&P/ASX 200 since it appears investors aren’t willing to step in on the long side ahead of Yellen’s speech on Friday. Even good news from a few stocks on Monday couldn’t turn the trend to up. With momentum pointing lower, it isn’t going to take much negative news to pressure the index lower. On the other hand, it will take a major surprise to turn the momentum to up.