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Will the ASX follow the Dow Jones to new all-time highs?

The US major indices are ploughing into new uncharted territory, while the ASX200 is also showing signs of strength. Could the Australian market also follow suit and have a crack at hitting all-time highs?

Global interest rate and growth environment

The US posted a resilient jobs report last Friday with 128,000 jobs added in October. This follows the US Federal Reserve making a quarter-point interest rate cut as insurance against ongoing risks from slowing global growth and the impact of the 16-month US–China trade war. However, the Fed has made it clear that it does not expect to lower borrowing costs further unless the US economic outlook materially deteriorates.

On Tuesday night, the US economy passed a crucial test that saw its ISM Non-Manufacturing Index, a leading indicator of the health of the services sector, beat economist estimates by a substantial margin of 54.7 versus an expected 53.5. While the economy remains vulnerable, the bull case remains intact.

What does this mean for the ASX?

My opinion is that the ASX is in a much more vulnerable position than the US markets.

The ASX200 is dominated by financials, namely the big four banks. As investors might have noticed, they aren’t doing that well. The low interest rate environment has slashed their net interest margins, while the recent property market recovery has yet to bolster profits.  

The Westpac Banking Corp (ASX: WBC) full year result triggered a sharp decline in the banking sector. The company reported a 16% decline in statutory net profit and a 15% decline in cash earnings. This also saw the bank cut its dividend materially and launch a massive $2.5 billion capital raising. This brings into the question whether or not other banks will need to raise capital to maintain the strength of their balance sheet and capital requirements, reduce dividend franking or cut dividends.

In order for the ASX to move forward, it will need the support of the financials sector. If the market witnesses more capital raisings and dividend cuts, then the ASX200 at 7,000 will continue to remain a fantasy. The Westpac capital raising will also bruise the sector, which will take time to recover.

What about other sectors?

Elsewhere, miners such as the BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Ltd (ASX: FMG) have been strong performers following firm iron ore, copper and other material prices. Likewise, sectors such as healthcare and consumer staples have also been solid performers.

Foolish takeaway

The market is trying to push higher, but I believe that weakness in ASX financials and big four banks will continue to suppress the likelihood of a push to all-time highs.

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Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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