Equities - The Show Goes On:Solid economic growth, improving company earnings and, in the case of Europe, favourable currency movements, are conspiring to underpin major equity markets. In the short term, however, the end of month profit taking may well temper investor enthusiasm, especially with regard to the US markets and the FTSE.
In fact, the Nasdaq hit our 2,200 upside target - set at 2,075 - while the FTSE is just 100 points shy of our 5,400 target, which we first mentioned early in Q105 when the index was trading at 4, 860. With regards to the Nasdaq, 2,200 is clearly a major resistance level. Nevertheless, we feel that the market has sufficient momentum on a medium-term basis to break higher. The same is true of the FTSE, despite the likelihood of further profit taking and price declines over the coming days. Key support exists at 5,200.
The Nikkei index is homing in on the key 12,000 level, to which we have often alluded. Although it has disappointed at this mark on two occasions in the past 16 months, current momentum is looking encouraging. Any break through 12,000 would set up significant medium-term gains beyond 14,000. The Bank of Japan recently expressed greater confidence in the growth of domestic demand, stating too that y-o-y core CPI may well turn positive by year end. That said, the markets will be closely watching the upcoming vote on the legislation regarding the Post Office privatisation, expected this week. The outcome is uncertain, and Prime Minister Koizumi has threatened a snap election should the law be blocked in the Lower House. This would clearly have a destabilising effect on Japanese financial markets. Yet, if the legislation were to be passed, it would represent a significant step in the right direction for structural reform, which together with further positive economic data could act as the trigger to push the Nikkei through 12,000.
The Hang Seng continues to fly in line with our view. Having closed the month at 14,880, the index is looking strong. The attraction of buying companies with close links to China is underpinning demand for Hong Kong equities. We maintain our 16,000 upside target.
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