ASX 200 tests support at 5900

Australia is headed for a period of political uncertainty, while tighter Chinese monetary policy and a crackdown on capital outflows will slow the local real estate boom. Employment is strong but low wage growth suggests under-employment.

Wage Index

Reliance on mining and real estate as the backbone of the economy is bound to disappoint. What the economy needs is a vibrant manufacturing and tech sector but this is shrinking rather than growing, with investment in machinery and equipment falling from 8% to almost 4% of GDP over the last decade.

Wage Index

Stocks are rising but we need to temper our enthusiasm with a hint of caution. The ASX 200 is testing medium-term support at 5900. The tall shadow on Friday’s candle indicates continued selling pressure. Breach of 5900 would warn of a strong correction to test primary support at 5650, while respect (indicated by recovery above 6000) would confirm an advance to 6250 (5950 + 300).

ASX 200

* Target calculation: 5950 + ( 5950 – 5650 ) = 6250

I remain wary of the banks because of their low capital base and high mortgage exposure. Reversal below the medium-term trendline warns of a correction to test the band of primary support between 8000 and 8100. Recovery above 8800 is less likely.

ASX 300 Banks

Miners are more bullish despite the low iron ore price. The ASX 300 Metals & Mining index is testing medium-term support at 3300. Respect is likely and would signal another advance.

ASX 300 Metals and Mining

Australia: Economy needs more support

Low corporate bond spreads (BBB-Treasury) indicate the absence of financial stress.

Corporate Bond Spread

Australian wage growth is also low, but declining.

Wage Index

And shrinking currency growth suggests the economy needs even more support than the large recent spend on public infrastructure.

Currency Growth