UNIT University Network for Investing and Trading UniMelb

Before The Bell 31/03/2019

By: Dominic Holden


Equities:

In the US, the S&P 500 reached 2,834 index points at close, continuing a four-month growth period in recovery of late 2018. With the Information Technology Index up 19% YTD, this growth is heavily driven by the tech sector, and showing no signs of slowing. Cashing in on this boom is ride sharing business Lyft, going public with an IPO raising $US3.2 billion. Despite losing $US911 million last year, stock performance on Friday indicates investors remain buoyant of Lyft’s growth potential. Keep an eye on similar Silicon Valley private companies looking to go public in the coming months, such as AirBnb, Pinterest and particularly Uber.

Closer to home, the ASX200 headed marginally upwards to 6,180 points, continuing an impressive six-month period. Buoyed by slight improvements in US-China Trade War relations, Australian mining giants drove the uprise with Rio Tinto gaining 1.6% on Friday alone. Elsewhere, infant formula producer Bubs Australia shares were halted on Friday, with news of a potential acquisition distributed to shareholders. Bubs have soared over 40% in the past month, with enormous revenue growth in Chinese markets driving the surge in a similar manner seen with A2 Milk in recent months. While little information is available regarding the potential acquisition, a recent contract with supplier Beqa Cheese could indicate the need for expanded processing facilities.

Commodities:

Gold prices have boomed in the past 6 months, improving by over 8% to a peak of $1343 before settling at US$1293 per ounce. This has been partially driven by Russian Central banks attempting to diversify from American assets, purchasing one million ounces in February alone. However, as the Russian effect becomes expected in the global market, expect a slowdown in price rises unless substantial increases in purchases from Putin arise.

Oil continues to trend upwards, with highs just under $US70 a barrel in the past week representing significant movement since lows of $50 last November. This trend is likely to continue, with the combination of Venezuelan blackouts and the Saudi-driven OPEC’s desire to balance their budget beginning to limit supply. An interesting battle arises regarding the oil price, with US President Trump publicly imploring OPEC to increase the flow of oil despite an unofficial Saudi aim of $US70 a barrel. Expect serious volatility in the coming months as these conflicting interests trade barbs.

Forex:

After the Reserve Bank of New Zealand indicated bias towards easing interest rates, the Australian dollar fell sharply Wednesday to US$0.707 before a slight recovery to US$0.709. While the RBA is highly unlikely to lower the cash rate in their upcoming Tuesday meeting, any sign of a movement away from a neutral bias will compound poor job vacancy data and weaken sentiment regarding the Australian market, causing the dollar to drop again.

Bonds:

In the past month, US 10-year bond yields have fallen from 2.76% to 2.41%, falling marginally below 3 month yields of 2.40%. While a brief yield curve inversion is no cause for great alarm, a continued inversion is a leading indicator of a recession. Investors will bewatching bond yields closely as a metaphorical “canary in the coal mine” for the global economy.

Other News:

With the release of the Federal Budget and an RBA cash rate decision on Tuesday, this week represents an important turning point for the Australian economy. The Government faces a tough trade-off between appeasing voters in an election year by easing cost of living pressures, and the need to reign in a ballooning public debt. Tax cuts for middle income earners may be brought forward alongside the instant asset write off exemption for small business; both very popular policies with everyday voters, but again representing less receipts for a Government under pressure to deliver a surplus in the near future.

Across the Tasman, recent indication of quantitative easing by the RBNZ has ensured all eyes will be on the RBA Tuesday. Recent job vacancies data and falling bond yields may foreshadow an economic slowdown, potentially forcing the RBA’s hand into dropping the cash rate which has remained unchanged at 1.50% for eighteen months. Such a move may be premature this week, but cannot be ruled out before the end of the year.


Sources: Bloomberg, AFR, Fairfax, Financial Times

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