Falls on Wall Street in the past few days means the US market has entered a tight trading range, with the Dow over the past month trapped between 10,800 and 11,600.
A breakout from this trading range will occur eventually, and the direction of that movement will be a powerful indicator of the mid-term performance of world share markets.
Another indicator will be the Bank of England, which is reviewing its official interest rates tomorrow and this will make an interesting comparison with the recent US review.
Both economies appear to be under pressure, however, and it is hard to believe that rates will be lifted. This lends weight to my view that deflationary forces have the upper hand globally, despite all the injection of liquidity by the central banks.
Markets hate uncertainty and it is quite likely there will be volatility to come across the Tasman in light of the Australian government's defeat in the courts over its its plans to handle illegal immigrants offshore. The government is very fragile and PM Julia Gillard is unpopular. Outright collapse cannot be ruled out, which would be bound to put a dent in investor confidence.
On the other hand, statistics out today show strong GDP growth in the June quarter and this has lifted the local markets despite the gloom on Wall Street.
With luck, this means we are returning to the pre-globalisation days where markets moved in a different direction to each other depending on local conditions. This can act as a ‘fire break’ when you have a financial or market issue in one particular economy.
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