UNIT University Network for Investing and Trading UniMelb

Before The Bell 26/08/2018

By: Tony Xie


Equities

Domestically, following the implosion of the political leadership, the ASX index has been pushed to a three-week low: sitting at 6239.4 index points on last Friday, the Australian equities market has been primarily weighed down by the finance and utility sectors. Unsurprisingly, both sectors are those heavily influenced by governmental regulation, as the prospect of changing government also entails the possibility of new regulations. Out of the major players in the index, ANZ recorded the largest dip, falling 2.4% down to $28.41. However, following the introduction of Scott Morrison, the former Treasurer, the Australian markets are expected to stabilise and regain their growth.

Internationally, Chinese tech titan Alibaba has disappointed investors with a slight profit margin drop in some investments. Similarly, Tencent experienced its first drop in profit for over a decade, losing around $170bn since January 2018. However, not all is gloomy in the Chinese tech market, as both firms aforementioned are ramping up investments to combat Western giants such as Amazon. Analysts suggest that the sector still holds latent potential, given Xiaomi’s strong growth in its first quarter.

Commodities

On Friday, oil prices increased by more than 1%, thereby putting an end to the run of weekly declines caused by Iran’s sanctions on global supply. Despite the ongoing trade war, the increase in demand has been mostly contributed from China; US crude has now risen more than 4%, following nearly two months of declines.

Within the commodities space, all eyes are on Saudi Arabia, as it has reportedly called off plans to take its state-owned oil giant Saudi Aramco public. Aramco is responsible for the majority of Saudi Arabia’s oil output and has been considered to undergo privatisation as the government moves away from its oil dependency. Should the IPO go ahead, it would be considered as one of the largest in history, with an estimated value of $2 trillion.

Forex

The Australian currency has largely endorsed the change of leadership within the Liberal Party, as it moved up to US72.89c immediately after the public announcement. Scott Morrison is seen by many as the most “market-friendly” option and is suspected as someone who will continue to reduce the fiscal deficit without introducing radical changes.

Last Friday, the Yuan jumped after the Chinese Central Bank implemented countercyclical adjustments to prevent the further depreciation of the currency. Elsewhere in the US, the dollar continues to fall after Federal Reserve chief Jerome Powell renews his call to “gradually” increase interest rates. Powell maintains the economy is growing at a sustainable pace, but precautions must be taken in case of unexpected shocks.

Bonds

In the US, whilst unchanged at the last meeting, the interest rate has been gradually increasing, with another hike expected soon thus bringing the rate to around 2.25%. Despite President Trump’s protests, Powell has justified the Federal Reserve’s decisions as he characterised the US economy as having strong growth in both income and jobs, a pre-requisite for possible demand-side inflationary pressures in the future.

Locally, Australian bonds experienced a brief slump last Friday as many investors parted ways with their debentures to cash in on the short-lived profit that the unstable political climate brought. The yield on Australia’s 10-year bond has now risen to 2.547% but will likely fall in the coming weeks.

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