The Australian market recorded another torrid week of losses as the Fed stance weighed heavily on investor sentiment. The investors however managed to drag the ASX 200 index just out of correction territory after a late rally on Friday.
Usually, a rally of 2.2% on a single day would be a cause of celebration. However, in a week that saw the market lose 2.6% for the week and enter into a rapid 10% correction territory, the late rally on Friday was more like a nervous sigh of relief for the investors.
The ASX 200 index has now lost almost 7% in January, recording its worst month since March 2020 when markets recorded a 30% COVID19 swoon.
The Fed said on Wednesday that it would likely raise interest rates in March and begin tapering bond purchase programme during the same month, with interest rates and inflation marching upwards nobody is sure how high they will go and many investors believe this could be the start of another big dipper ride.
Most analysts believe that there is going to be a lot of scary ups and downs from here and any recovery day like Friday could be just that, a short-term relief with even a 2.2% recovery on a single day coming nowhere near to making up for four consecutive days of falls.
Every sector on the Australian market was down for the week with technology stocks being the biggest victim. Technology stocks lost 8% for the week and are down 21.3% for the month of January so far.
One of the big events last week came from BHP however which ended its dual listing on London Stocks Exchange and have now listed all its shares on ASX. This move means BHP which previously represented 6% of the ASX 200 represents a mammoth 10.9%.
The move forced index funds and other managed funds that measure their performance against the index to buy up BHP shares. The move resulted in a 2.3%rise in BHP shares on Friday with an estimated $4 billion of extra demand for Australia’s largest miner.
The investors in Australia will now be waiting nervously to the Reserve Bank of Australia’s policy meeting on Tuesday for a hawkish tilt as domestic inflation has accelerated. With markets betting that US Federal Reserve could raise interest rates as many as seven times in 2022 there is also a strong expectation that RBA will drop its quantitative easing bond-buying programme.
While most analysts expect RBA to leave the interest rates at 0.1% on February 1, we believe that with inflation in Australia threatening to follow the US inflation rate even higher RBA will be forced to start raising interest rates as early as August.
As such it will be interesting to note what sort of guidance comes from the RBA meeting this Tuesday.
Traders will also keep an eye for domestic consumer confidence figures, home prices, lending figures, retail trade, new car sales, international trade, inflation expectations and building approvals, which are all due this week.
However, given the current volatility in share markets, it will be the movement in Wall Street that will define which direction the markets take. We feel that there will be more pain for investors to come with a bearish outlook for the US stock market hitting a nine-year high in the latest American Association of Individual Investors Sentiment Survey.
Last week we mentioned in our report that even though gold is looking bullish in the short term we are of the view that the upside momentum of gold could be hard to maintain due to an expected interest rate rise in the US. A rate hike usually reduces the appeal of holding a non-interest bearing bullion.
As predicted with growing expectations of US interest rate hikes pushing US Dollar to a multi-month high the yellow metal recorded its worst week since late November.
Gold prices slipped below their 100 and 200 day moving averages after the US Federal Reserve reaffirmed its plans to end its pandemic-era bond purchases and signalled an interest rate hike in March.
The rate hike expectations set the US Dollar to record its biggest weekly rise in seven months. Thus making gold more expensive for overseas buyers.
It will be interesting to see how gold prices play from here. We strongly believe that gold prices will go through a roller-coaster with both gains and declines limited from here as traders try to make choice between gold’s credentials as an inflation hedge amid rising stock market volatility and the cost of holding non-interest bearing bullion during a rising interest rate environment.
Oil prices however continued to climb for a sixth consecutive week, rising to a more than a seven-year peak on Friday, as geopolitical turmoil exacerbated concerns over tight energy supply.
As supply continues to remain constrained for oil and heightened geopolitical risks driven by fears that Russia may invade Ukraine many oil executives and a chorus of Wall Street Banks are predicting oil to return to $100 per barrel.
Oil prices so far have continued to defy the risk-off sentiment elsewhere with demand almost reaching pre-pandemic levels whereas the supply struggling to keep up with that. With geopolitical events on the Russian border added to the mix, we believe oil will be trading above $100 per barrel in the next few months.
The traders will be keeping a close eye on the February 2 meeting of OPEC nations and allies led by Russia, collectively known as OPEC+. However, we believe the OPEC+ will continue to stick with its current planned oil output targets.
The Australian Dollar fell below the key 0.7000 level against the US Dollar, its lowest since July 2020 on renewed greenback’s demand following Fed Reserve’s latest announcement on monetary policy.
Heating inflation has put US policymakers in action, resulting in Fed Chairman Jerome Powell pretty much pre-announcing an interest rate hike in March. On inflation, however, Fed Chairman expressed concerns that inflation would keep rising but at the same time, he is determined to combat it.
The decision boosted the greenback and sent the stock markets into a downward spiral, a perfect scenario for AUD/USD depreciation. With Wall Street closing in red for a fourth consecutive week and gold prices also plummeting the Aussie looks set to decline further.
Even technically the pair is poised to extend its declines. On the weekly chart, the 200 SMA acted as major resistance and the AUD/USD pair has plummeted after failing to breach it. The 20 SMA also crossed below the 100 SMA on the weekly chart and is pointing firmly lower.
On the daily charts also the bearish patterns are very clear and strong with all technical indicators maintaining their downwards slopes. The next relevant support level will be 0.6920 which will be keenly watched by the traders as a break below it could expose the Aussie to fall to as low as 0.6770.
While bulls may try to gain some momentum on Monday due to a green finish on Wall Street on Friday night, we believe sellers will most likely re-appear around 0.7100. AS such any rallies in the AUD/USD pair should be seen as an opportunity to sell.
The Indian Rupee too continued its decline against the US Dollar after the hawkish Fed policy stance.
Muted domestic equities, sustained foreign fund outflows and firm crude prices all continue to weigh on Indian currency as it breached the 75.00 mark against the US Dollar. The RBI had been aggressive over the last two years to keep the USD/INR pair below the 75.00 level. However, with this level finally breaching on massive risk-off sentiments it would be important to see what stance RBI takes to control the falling Rupee.
For traders in India, however, all eyes will be on the trajectory of crude oil prices and how the situation pans out in Eastern Europe.
Two weeks ago the crypto asset spot markets were dismal whereas the NFT market remained unscathed. Last week, however, it was a reverse of fortunes with NFT sales dropping 13% while the crypto prices rebounded from the market route.
NFT sales were down on all 12 blockchains that produce NFTs, with Ethereum’s gross NFT sales down 11.78%, Solana recording a 16.87% decline in gross NFT sales and Ronin shedding 47.83% on NFT sales for the week.
The crypto asset market on the other hand was very different as the market showed signs of recovery with Bitcoin and close to 40% of altcoins advancing. Bitcoin prices saw a gain of four days in a row at the time of writing this report and was now trading above the US$38,000 mark, after falling to the $33,000 mark.
In a surprise, for investors, the crypto market saw itself stabilising this week despite the hawkish stance of the US Federal Reserve. The cryptocurrencies have previously declined constantly on the Fed’s indication of a rate hike.
Ethereum prices too rose significantly to rise above the $2500 mark. However, it was Beagle Inu that was the top gainer on the crypto pack. The coin gained 745.72% on Friday alone.
In Agricultural products, all eyes have been on Ukraine this week. As tensions build on Russia (world’s largest wheat exporter) and Ukraine (major wheat producer) border, consumers moved to increase cover and wheat markets rallied.
South American weather also remained in focus with drought-like conditions in Brazil and Argentina price of soybean and corn crops both increased.
Moving forward we believe weather conditions in South America will continue to play a role in market direction and supply confidence for agricultural grains. It will be tensions and rhetoric around the Ukraine border however where the grain traders will continue to keep a close eye.
Author: Ateev Dang is a trader and trading coach by profession. He runs his own business called Glow trades Pty Ltd where he teaches anyone who is interested in starting on their trading journey how to trade. He can be contacted at adang@glowtrades.com.au.
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