UNIT University Network for Investing and Trading UniMelb

Before The Bell 09/09/18

By: Pooja Mallard


Equities

The ASX 300, which has been steadily rising since June, has had a dismal week dropping 205 points to 6089.50. This is its worst 5-day performance since February earlier this year, essentially wiping out the gains made in the past 3 months. A large part of this loss is attributable to the rise and fall of Afterpay Touch Group Limited (ASX: APT). The company’s stock doubled in value over the past 2 months from $10 per share to $21 per share, a result of outstanding reports of revenue and earnings increases. However, over the past week, the company has lost 25% of its market value, with its share price dropping from $21 to $15. The dip in the ASX is indicative of a reporting period not living up to expectations and the slowing of global economic markets more broadly.

Moreover, the looming threat of Trump’s trade war with China, whose investors have historically been heavily involved with Australian equities, could further explain the drop in the ASX. The implications of rising tensions between the US and China over President Trump’s threats of imposing tariffs on Chinese goods are reflected in the S&P 500 and Nasdaq indices, which have dropped by 30 and 207 points respectively. Many large companies included in these indices, such as Apple and Ford Motors, have been negatively affected by the trade war as a significant amount of their production and materials come from China. This could lead to rising input costs and diminished sales, affecting the profitability of these companies, which could potentially prompt a frenzy of sell-offs in the coming weeks and months, should US-China relations worsen.

Bonds

In the US, Treasury yields spiked, with 10-year Treasury yield climbing 3.4 basis points to 2.911%, and 30-year bond yield rising 2.2 basis points to 3.076%. This occurred soon after the release of the August jobs report, revealing that 201,000 jobs were created, pushing unemployment rate down to 3.9% and causing an increase in average hourly earnings, a key measure of wages. The latter signals a possibility of increasing inflationary pressures as wage growth accelerates and bolsters the need for the Federal Reserve to raise rates.

Commodities

The persistent trade tensions between the U.S and China have resulted in a decline of oil prices in the last two weeks, with Crude Oil down to $68 a barrel. This continued dispute as well as fears surrounding the adverse effects of U.S sanctions against Iran may dampen the possibility of economic growth that powers energy demand. Further, various emerging economies plagued by crisis can perhaps hinder oil demand, however, the International Energy Agency expects the market to tighten as they put upward pressure on prices.

In other news, China has taken advantage of the surge in aluminium demand following U.S sanctions against United Co. Rusal that has left buyers seeking alternative supply chains. Prices rocketed as a result, earlier on in April, and China has shipped more than 1.5 million tons in the last three months, a record for a three-month period. The Asian giant has also seen a boost in alumina exports due to the supply interruptions caused by union industrial action at Alcoa Corp’s plants in Australia. The further expansion of China’s exports rests upon the outcome of Rusal’s president, Oleg Deripaska’s negotiation with U.S authorities to lift the sanction which till then, places China in an advantageous position.

Forex

Exports to China constitute a large part of Australia’s GDP, and as a result any negative influence on the Chinese economy would in turn affect the Australian economy. The recent developments in the US-China trade war have had a negative impact on the Australian dollar, which is now trading at 71 cents to the US dollar. However, following the news of US job growth by the US Labor Department and President Trump’s readiness to impose further duties on Chinese imports, the Australian dollar is expected, by many, to fall to as low as 70 cents against the greenback.


Sources: Reuters, AFR, Bloomberg, MarketWatch

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