Weak trading besets markets

Weak trading sessions in the US and European markets will likely rebound in local trading on Tuesday. Investors at the Australian Stock market would likely be on the sidelines as there would be some reluctance ahead of the RBA interest rate pronouncement at 2:30PM AEST.

IG Markets strategist Mr Ben Potter said in a briefing note "trading volumes should be a lot better than yesterday as most of Asia returns from holiday."

"Once again, the local index is expected to open around crucial support levels; we wouldn't be surprised if we see buying support emerge, although there could be some reluctance ahead of the RBA interest rate decision 2.30pm AEST."

Mr Potter also noted that locally, the ASX 200 is called to open the session 0.8 percent lower at 4534 following the bearish overnight leads.

"With all US sectors finishing firmly in the red, it's likely to be another day of broad-based weakness," he added.

ASX Companies: Gainers and Losers

Energy and financial sectors were the biggest decliners, falling 2.3percent and 1.9percent respectively. Local energy stocks could see some weakness after crude oil prices sold off, losing 1.2percent to US$98.89/bbl since our 4.30pm close yesterday. The likes of ExxonMobil, Chevron and ConocoPhillips were all down more than 1.1percent.

Financials are likely to come under pressure yet again after US banks saw significant selling following chatter that Washington is thinking of increasing capital requirement. Bank of America, JPMorgan, Wells Fargo and Citigroup were all down more than 2.2percent after Wells Fargo was downgraded by Rochdale Securities to sell from neutral.

Elsewhere, the consumer discretionary and material sector were down 1 percent and 1.1 percent respectively and will almost certainly come under pressure during Asian trade. Materials leads were mixed at best with base metals on the LME finishing mostly firmer and Rio Tinto and BHP Billiton adding 1percent and 0.9percent in London trade. However, it doesn't look as rosy for local names, with BHP's ADR calling the locally listed stock 0.8percent weaker at $42.67.

AUD Direction

Overnight, the USD strengthened against all G10 currencies with the exception of the JPY which traded down to 79.98 before a modest rebound. Notable decliners were the Scandinavian currencies, with the Norwegian krone losing more than 1 percent as oil prices headed lower.

The currency in focus today will no doubt be the AUD/USD given the RBA rate decision. There is every chance we may see some heightened volatility given the market has become more spilt in its view than in recent meetings. At present, five out of twenty eight economists surveyed by Bloomberg suggest we will see a twenty five point hike today, with the credit markets pricing in a 16percent probability.

The RBA have signalled they will raise rates 'at some point' and with the labour market near full employment and record levels of investment expected next year, some are suggesting the RBA may look to get ahead of the curve with a pre-emptive strike on inflation. If this is the case and the RBA do raise today expect the AUD to fly against all currencies, with AUD/USD and AUD/JPY probably seeing the bulk of the gains, and the ASX 200 trading below 4500.

However, if they stay on hold (which we expect) and retain a mildly hawkish bias we could see modest gains on the AUD/USD given there is a 50percent chance of an August hike. On the downside, an acknowledgement of the global slowdown and a more dovish tone could see significant weakness, with the market likely falling below 1.07 given the rate expectations that are priced in across the curve.

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