Will ASX 200 Follow the S&P 500?

• S&P 500 in the US hits all-time high. 

• ASX 200 is getting close to a potential breakout. 

• Jobs report on Friday in America could have a “knock on effect.” 

• Many Asian currencies are “pegged to the US Dollar”, either directly, or through a traded range. 

During the Wednesday session, we have seen the Australian Stock Exchange show significant strength, reaching above the AU$7800 level. The question at this point will be whether or not Austria will follow the rest of the world, as typically you will see indices worldwide move in a similar fashion. 

This brings to the forefront the S&P 500 in the United States. The S&P 500 made a fresh all-time high at the end of the session on Wednesday, closing at the very highs of the day. As the cash index is now breaking above the 5350 level, it looks like the risk appetite is starting to come back into the forefront of the psyche of traders. There are a whole litany of reasons to believe that the S&P 500 should continue to go higher, not the least of which is that traders are trying to price in the idea of an interest rate cut in November from the Americans. 

Australia of course will follow right along, as central banks worldwide tend to move in unison. This is especially true with developed economies such as the USA and Australia. It is anticipated that the current rate that Australia has is the peak, as it is 4.35%. Given enough time, traders fully anticipate that the RBA could cut rates to as low as 3.10% by the end of next year. 

Equities and “Cheap Money.” 

With interest rate cuts, stock markets will typically rally, unless of course there is some type of financial stress. As things stand right now, it does not appear that equities traders around the world are overly concerned, so it’s very likely that they will continue to look at stocks as a way to fight what could be shrinking currency strength, and of course playing the idea that both the Federal Reserve and the Reserve Bank of Australia will flood the economy with stimulus be a cheap money, allowing for corporations to take on big projects. This directly affects not only the financial sector in Australia, but also the materials sector, two of the biggest factors when trading the ASX 200. 

Targets 

While the S&P 500 will more likely than not pay close attention to the 5500 level, the ASX 200 could very well have an eye on the AU$8000 level. It’s worth noting that these targets are based upon the idea of options at large, round, psychologically significant figures, but it’s also worth noting that volatility is probably something that can be expected. 

For what it is worth, Friday sees the Non-Farm Payroll announcement coming out the United States, giving traders an idea as to how the employment part of the American economy is going. If it is a poor figure, it could have traders looking to place bets on commodities, which in turn of course has a direct correlation to companies such as BHP, Rio Tinto, etc.  

This could also help Australian financials, as currencies in various parts of Asia are pegged to the US dollar. With cheap money being the de facto monetary policy in places like Hong Kong, China, and others, it could drive up the demand for financial products coming from the Commonwealth Bank of Australia, the National Australia Bank, ANZ Group Holdings, and many others. 

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