UNIT University Network for Investing and Trading UniMelb

Before The Bell 19/05/2019

By: Victor Yan


Equities:

The past week has been filled with speculation surrounding ballooning trade war tariffs resulting in hits on equity and futures markets. However, due to the resilience of the indexes, we have seen a bounce-back from such earlier losses. For the time being, bearish volume has manifested in the form of hedges instruments rather than an all-out exit. Despite an increase in risk due to our current financial climate, the appetites of Americans for such risk have grown accordingly, as shown by the lowest share of expectations for stock price drops according to May’s consumer confidence report.

Therefore, the outlook for investors seems largely leveraged on the expectation of an eventual trade deal, as investors are prepared to endure such “road bumps” as witnessed in the past few days. Yet, improbability does not indicate impossibility, as worst-case scenarios by JPMorgan Chase & Co. see a permanent increase in tariffs on Chinese goods possibly sending the S&P to 2,550 from where it is currently sitting at 2859.53.

Commodities:

Market sentiment on Brent Crude Oil is currently bullish, primarily due to new IMO rules which will take effect in 2020 – requiring sulphur content in fuels be reduced to less than 0.5% from its current levels of under 3.5%. In order to avoid higher costs for shipping, we could potentially see a redistribution in fuel demand towards middle distillate (among these Brent Crude) – of which qualify under the IMO threshold.

Looking at a more unconventional commodity – Pork Futures. CME Lean Hogs have skyrocketed off the years start as a result of an outbreak of African swine fever in China, starting the New Year’s at $60.00 and most recently trading at $93.00. With China being the world’s 3rdlargest importer of pork, this depletion in domestic pork manufacturing has led to US pork producers benefiting from unsatisfied demand from China. For the ongoing future, if this agricultural malaise goes uncorrected, expect China to become increasingly reliant on foreign pork exporters to feed its population – translating to a bullish sentiment for pork futures.

Forex:

Overall market outlook on the AUD is been bearish for the coming short term, and the currency has continued its descent Already down 1.8% for the month (currently at 0.68 US dollars), depreciation damages are largely derived from the escalating US-China trade war, where worst-case scenario fears involve a stunted growth for the Chinese economy if hard-scaled tariffs are fully legitimised, allowing for a possible drop in Chinese purchasing power that could spell less importing activity from Australia’s biggest trade partner, ultimately placing further downwards pressure on the AUD.

On the other hand, with a Liberal election win declared over the weekend, this may have cleared up clouded uncertainty surrounding investor tax treatment under a Labor victory. This could possibly weigh positively on consumer and business sentiment for the AUD.

Bonds:

Australian bonds have continued their downwards trend week on week, with the 2-year down to 1.20% yield, the 5-year down 1.26% and the 10-year down 1.64% respectively. However, May’s RBA announcement issuing a hold decision onto interest rates perhaps entails a bias for a rates cut in the coming months, where theory suggests this could be a catalyst for a recovery in bond yields.


Sources: SMH, Bloomberg, AFR, Oilprice, The Economist 

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