UNIT University Network for Investing and Trading UniMelb

Before The Bell 06/05/2018

By: Jason Shao


Equities:

Amidst the Royal Commission probe into the financial sector, AMP’s stock has slumped 26% from recent highs to its low last week, after seeing its Executive Chairman and Chief Executive resign. However, the share price has seemingly held its ground in the last few days, rising 3% from the bottom to close at $4.14 on Friday. Although this small rise doesn’t necessarily end the share price woes of the company, the rise could at least signal the end of the sharp drop, and we could expect the share price to stabilise over the next week.

The ASX 200 has also broken the 6,000-points barrier last week, a completely different picture to the US stock indices right now. After successive increases for a week, it closed slightly negative on Friday, potentially due to some profit taking. Whether this momentum holds up is a difficult guess, but a stabilisation of the financial sector could see further gains in the index, or at least hold its mark.

Commodities:

Crude oil has continued its momentum in the past week, ever so close to touching the $70/barrel mark. Analysts are looking carefully at whether Trump’s threat to pull out of the Iran nuclear deal on May 12th, and if he does, could see oil exports from Iran fall, supply tighten and oil prices rocket up. Iron ore market has also marked a historic point, as China opens up its iron ore futures market to the rest of the world.  Iron ore currently sits at $67/t and could see some further gains down the road if Chinese steel demand improves sentiment.

Bonds:

The Fed’s written statement last week was interpreted as it being happy with the way inflation is currently progressing, and that it was not looking to raise rates as quickly as some might have predicted. The 10-year US treasuries have slightly retracted from 3%, and we see a flattening of the yield curve, with yields increasing by less than 50 basis points from 5-year yields to 30-year yields, which means that by taking in a significant amount of risk and extending the duration by 25 years, investors will only see very slight increases in yield. Expect the demand of shorter-term bonds to increase (hence a fall in the yield), and the demand of longer dated bonds to decrease, restoring the convexity of the yield curve.

Forex:

The Fed’s decision of slowly increasing rates rather than quickly will play a big role in the USD. Although the USD has rebounded strongly in the past few weeks after some initial weakness during the year, we could see a slow-down in the rebound of the dollar after the Fed decision. The AUD-USD pair continues to fall, currently sitting at 75.4 US cents, but could see the decline be maintained, so eyes on the US dollar in the coming months. Also, the NAB Business Confidence and Westpac Consumer Confidence Index are released this week, so any significant changes could potentially flow through to the Australian dollar.

Other Assets:

Bitcoin continues its march back to the $10,000 USD mark, after reaching lows of $6,600 USD. We expect to see Bitcoin to break the $10,000 USD key mark in the next week or so if momentum holds. Also, inner suburb residential property prices of Melbourne and Sydney have fallen as much as 10 percent in the past year, and we could see further declines in house prices in general in major cities, as banking lending rules tighten after the Royal Commission saga.

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