Fresh highs for the ASX200, despite likely extension of NSW lockdown

The fifth week of lockdown is underway for Greater Sydney, and with new Covid cases heading in the wrong direction, an extension of the current lockdown appears a formality.

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A chart that has made a deep impression in recent days compares the impact of the sharp rise in new Covid cases and fatalities in the UK and Indonesia.

The UK saw new cases surge higher in July. However, hospitalisations and fatalities remained low because of a high vaccination rate of around 55%, which reduces the impact of the Delta variant.

In contrast, the surge in new Covid cases in Indonesia with a vaccine rate of just 6.5% caused fatalities to rise at an alarming rate. Given the need for a higher vaccination rate, September is now being touted as when lockdowns in Sydney will gradually come to an end.

In recognition of this, the economics team at Goldman Sachs have downgraded their Q3 GDP forecasts for the second time in two weeks and now expect to see Q3 Australian GDP contract by -1.4%q/q.  

However, the outlook is not all dire. This is an important consideration, especially for those trying to reconcile the deteriorating economic picture in Australia with the ASX200 trading at fresh all-time highs.

Vaccine supply is expected to ramp up in the coming weeks, a critical element in reaching the governments' vaccination targets to end this lockdown and prevent future lockdowns.

A second factor is increased fiscal support from the State and Federal Government, including the Disaster Payment of $600 per week for those who cannot work due to mobility restrictions.

Finally, household balance sheets are in a strong position. Saving levels are high, and the strong housing market is providing comfort. All of which points to a sharp snapback in economic activity in Q4.

Technically, the ASX200 is at an interesting juncture showing some preliminary rejection of trend channel resistance at 7420 on bearish RSI divergence.

While below trend channel resistance the preference is for further range trading including a retest of the bottom of the range at 7200. Aware that a sustained break above 7420/40ish is needed to indicate that the next impulsive leg higher is underway.

Fresh highs for the ASX200 despite likely extension of NSW lockdown

Source Tradingview. The figures stated areas of the 26th of July 2021. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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