UNIT University Network for Investing and Trading UniMelb

Before The Bell 08/10/2018

By: Mazen Elsabrouty


Equities:

It has been a tough week for Australian equities, particularly the banks. After the release of the Royal Commission reports last week, the big 4 banks saw share price declines of nearly 2%. With Australian housing finance data for August set to be released on Friday, the outlook is bleak for the banks. With soft loan data from property investors expected, banks will continue to face increasing earnings pressure in the short term, especially with the looming credit crunch. Additionally, the NAB Business Confidence and Westpac Consumer Confidence survey results will be announced on Tuesday and Wednesday respectively. It is expected that business conditions will be stable whereas consumer confidence will improve slighted after solid retail sales growth in August.

Meanwhile in the US, much discussion has been focused around the potential end of the epic US equity bull run. With the DJIA, S&P 500 and NASDAQ all falling this week, there is talk that the strengthening yields will signal a shift in asset allocation away from stocks towards bonds. With speeches by both John Williams and Raphael Bostic from the Federal Reserve on recent monetary policy developments and economic outlook due this week, investors will be interested to hear their tune, especially following the landmark trilateral trade agreement, USMCA, struck last week.

Commodities:

Following the continued sanctions on Iran, oil prices rose with crude oil reaching a 4 year high before settling at US$84.16 a barrel last week. With Saudi Arabia and OPEC claiming that they will make up for the reduced supply, the jury is out on what the future of oil prices will be. According to data from the CME, oil traders are bullish that prices will rise to US$100 a barrel by next year – a unique proposition given record US production growth and flat global demand.

Conversely, gold prices have tumbled in the past few months, despite US-China trade tensions continuing to escalate. Typically considered a safe haven asset, it has fallen from US$1372 per ounce in April to US$1205 per ounce. Although gold prices have modestly increased by US$20 per ounce in the last 2 weeks in line with slight retractions in the US dollar, if the US dollar picks up, expect to see gold prices slumping below US$1200 per ounce.

Forex:

As quantitative tightening continues in full flow, the US dollar continues to rally from strength to strength despite a lacklustre week. Conversely, the Australian dollar, widely seen as a trading proxy to future Chinese economic growth, has continued fall, shedding nearly 8% this year alone against the greenback. The AUD-USD exchange rate is expected to further decline below 70 cents as emerging markets continue to suffer, at least in the short term.

Furthermore, with key Brexit talks currently at an impasse and with concerns regarding the debt levels of the EU, the USD-EUR exchange remains at 0.8678. Unless a Brexit deal can be struck between the UK and the EU, markets will continue to value the Euro and Sterling at a slight discount to the US dollar.

Bonds:

On Friday, the US 10 year yield rose to 3.23%, a 7 year high. With markets buoyed by, yet again, another strong month of US employment data, treasury yields have continued to steadily rise over the past few months. This trend is expected to continue as investors adjust to the post quantitative easing era in the US. With markets pricing in another interest rate hike by the Federal Reserve in December, it is not inconceivable to see the US 10 year yield hovering around 3.5% by the end of this year. Additionally, investors will be tuning in to see how the core inflation numbers will compare against the current target rate. Increased inflation numbers will likely result in an additional boost to the US 10 year yield, accelerating the Fed’s current rate hike policy.


Sources: Bloomberg, AFR, Reuters

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