Interpac Business and Migration Solutions Melbourne Australia

(October 11, 2011)

As the local sharemarket’s rally enters its fifth consecutive day, investors are asking just how sustainable the strong gains are, considering the euro-zone's debt woes, which sparked the recent slump, still haven't been solved.

‘‘I think the market will see a rally for a few weeks,’’ said Bell Direct equities analyst Julia Lee, but cautioned that stocks may not continue to gain as rapidly as they had last week.

The S&P/ASX 200 rose as much as 1 per cent this morning to 4245.4, before falling back slightly. The index was still up about 0.4 per cent around midday, building on four consecutive positive sessions. Last week’s 3.8 per cent gain on local shares marked the strongest weekly rise in 13 months.

Overseas, Wall Street’s major indexes closed more than 3 per cent higher overnight. The S&P 500 last week enjoyed three consecutive sessions of gains of about 2 per cent a day.

The market’s direction, however, is not purely driven by optimism about the future and belief in the strength of company earnings.

Ms Lee said the jump in global equities had been fuelled by investors covering short positions. ‘‘The short positions were closed out and then those positions were being bought which drives up prices,’’ she said. In order to ‘‘short’’ a stock, investors typically sell a borrowed stock, then purchase it back at a lower price to realise a profit.

Some of the pep in the market was attributed to glimmers of hope for more calm in the European debt crisis. Investors applauded news that French President Nicolas Sarkozy and German Chancellor Angela Merkel pledged to announce a plan to recapitalise European banks and address the Greek debt crisis by the G20 summit at the beginning of November. The countries also offered political backing for a permanent €500 billion European Stability Mechanism bailout fund.

Tim Radford, analyst for Sydney-based Rivkin Securities, ‘‘‘The recent rally was in line with a dampening of concerns regarding what’s going on in Europe.’’

In addition to the short-covering, investors have been lured in by the low prices on on stocks, he said.

‘‘You saw a lot of value-seeking specifically in the Australian market on Thursday and Friday but nothing has really changed in US and Europe.’’

The Europe issue, not to mention US growth fears, are far from resolved. A crucial test this week will be if the positive momentum translates into genuine investment appetite on hopes for an improving market, said Mr Lee. She believes the ASX/200 is likely to rise over the 100-day moving average at 4340 points. 

Should the ASX/200 stay at or above that level for a week, it would suggest a more durable rally, said Ms Lee, with the caveat that offshore events could easily shift sentiment downward.

Others, such as CCZ Statton Equities director Dave Hofman said shares must rise beyond 4500 for the rally to be sustainable.

There is no shortage of events this week that could derail a rally including euro zone-member Slovakia’s vote on the European Financial Stability Facility, along with the kick-off of earnings season in the US and unemployment data in Australia on Thursday, expected to give further insight into the strength of the local jobs market.

Morgan Stanley's global strategist Gerard Minack said a short-term rally was possible. But with the larger issue of Europe’s sovereign debts and the US economy looming, they remain the key question.

‘‘I think we will see a recession in Europe and US next year, and bank bail-outs will increase stress on sovereigns,’’ he said. ‘‘Who's going to rescue the rescuers?  That's the big picture problem.’’