ASX200 consolidation - Part II

After another positive lead from the U.S. stock market that saw the S&P 500 close at its highest level since early March, less than 13% from its all-time highs, it’s been a frustrating session today for followers of the ASX200. Despite Australia’s progress in containing the coronavirus, and an encouraging partial re-opening of the economy, the ASX200 remains 22% below its all-time high. While we note that the Australian stock market lacks any “FAANG” growth stocks like Amazon or Apple, there is a dark shadow hanging over the local market in the form of a sharp deterioration in the relationship between China and Australia.

After another positive lead from the U.S. stock market that saw the S&P 500 close at its highest level since early March, less than 13% from its all-time highs, it’s been a frustrating session today for followers of the ASX200.

Despite Australia’s progress in containing the coronavirus, and an encouraging partial re-opening of the economy, the ASX200 remains 22% below its all-time high. While we note that the Australian stock market lacks any “FAANG” growth stocks like Amazon or Apple, there is a dark shadow hanging over the local market in the form of a sharp deterioration in the relationship between China and Australia.

Following Australia’s persistence in calling for an independent inquiry into the origins of the coronavirus, now backed by approximately 120 countries, China last week suspended beef imports from four Australian abattoirs and imposed an 80% tariff on imports of Australian barley.  

Headlines earlier this week reported that China was considering targeting more Australian exports including wine and dairy. While the impact of tariffs on barley and beef is minimal, less than 0.05% of Australia’s GDP, there are fears that China may turn its attention to Australia’s biggest exports, coal, and iron ore.

Today that threat appears one step closer to reality. The AFR is reporting that a change by China to its inspection procedures for iron ore imports can be used to block Australian exports of iron ore, effective June 1. Iron ore exports account for a significant 3% of Australian GDP.

While it is possible that the timing of the Chinese announcement is a coincidence, the optics are poor. Iron ore mining stock Fortescue Metals Group (FMG) is trading -2.40% lower on the day and the ASX200 has brushed off the positive lead provided by Wall Street to be trading flat, near 5575.

In our last article on the ASX200 from the 4th of May here we called for “four to six weeks of consolidation between 5550 and support at 4850”. Four weeks later this call has turned out to be broadly on the mark.

Looking forward, the 5600 resistance area is shaping as an important technical level in determining whether the ASX200 continues to underperform its global peers or attempts to play some catch up in June. My preference is for the former.

ASX200 consolidation - Part II

Source Tradingview. The figures stated areas of the 21st of May 2020. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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