UNIT University Network for Investing and Trading UniMelb

Before The Bell 14/10/2018

By: Michael Lee


Equities:

After a tumultuous week in the global equity market, with the Dow plunging the most on daily changes since February, the VIX index, is sitting at over 20 points, the highest since April. The release of Core Retail Sales (MoM) on Monday will provide further indication on the strength of the retail sector, which has been in the positive territory for the past 12 months with forecast to grow at 0.5% (Source: Census Bureau). If growth in retail maintains its momentum US equity markets will be buoyed.

Minutes from the Federal Open Market Committee on Thursday will shed light on the Fed’s tenacity in raising interest rates, thus impacting the investor’s appetite for equity investment. Locally, RBA minutes on Tuesday will also confirm whether its dovish tone on raising rates continues with cash rates at the record low of 1.5% for the past 25 months, which had benefited the real estate and financial industry, a large portion of the ASX. In addition, the release of Australia Employment Change data, currently forecasted with an increase of 16.5k would likely drive growth in retail-related equities. (Source: ABS) In China, amid the escalating trade-war with US, its GDP data on Friday will provide investors with better guidance on the impact of a trade-conflict scenario. This would have dire consequence on the export of minerals in Australia and mining companies.

Commodities:

While Iron ore has broken over $70 in the last week, its dependence on China’s industrial activities and housing boom can make its demand rather volatile. The upcoming data on China Industrial Production (YoY) on Friday will provide clues on whether China can still sustain its 6% growth under the pressure from US trade-war, a new norm that has remained resilient, after its slow-down in 2015. On crude, WTI and Brent have slightly retreated to $71.34 and 80.43 respectively from yearly highs, which were last seen in 2015. The recent IEA comment “the oil market is adequately supplied for now” might mean the likelihood of oil price decline is low on the near horizon. The U.S. Crude Oil Inventories report on Thursday should indicate the demand for oil at these levels.

Forex:

The AUD remained subdued at around $0.71, as the divergence between FED and RBA positions on interest rates and the balance sheet continues to widen. As mentioned previously, the upcoming FED and RBA minutes would further confirm the view that the interest rate in US would continue to widen its gap with Australia.

Bonds:

With the widening gap in yield between Australia and US – AUS 2- and 5-year bond trading at 2.05% and 2.25% vs 2.85% and 3.01% of US treasury, this level of disparity is likely to accelerate if the upcoming Fed minutes report confirms this view.

Other Assets:

Despite  Friday’s report on the figure indicated the total home loan credit falling to $30.7b from $31.3 between Aug and July on a seasonally adjusted-basis amid the decline in property price (source: AFR), the next week’s RBA minutes should provide some cushion for investors and home owners against this potential market-wide panic in the property sector, if the cash rate interest continued to be kept at 1.5%.


Sources: Bloomberg, ABS, Census Bureau, AFR

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