Australian investors continued to ignore lockdown concerns as Australian shares closed the last week at a record high on healthcare and tech stocks boost.
Healthcare stocks continued to rally all through the week with another strong performance from CSL, helped by a firmer US Dollar. Australian Tech stocks followed suit with buy now pay later juggernaut Afterpay and Nuix Ltd leading the charge.
A strong US earnings season has helped the stock market across the globe to rally and Australia is no different, however, the gain in the Australian equity market was capped by worries about rising cases of Delta variant of Coronavirus.
A tighter lockdown in Sydney due to an increase in cases and a relentless rise in infections in Australia’s most populous state casts serious doubt on whether the economic outperformance of Australia can continue.
With Australia about to enter the end of the financial year reporting period, the focus in local markets will mainly be on lockdowns across the nation and rising COVID19 cases in NSW. The situation in NSW is setting Australia for a prolonged lockdown which is expected to move the Australian economy into negative growth in the coming quarters. With economists warning Australia can enter its second recession in as many years, the lockdown numbers will impact the mood in Australia.
Last week also saw bearish sentiment rise above the historical average for the first time in 24 weeks, while bullish sentiment declined to a 10 month low. Bearish sentiment indicates an expectation that stock prices will over the next six months, whereas bullish sentiment provides information on optimism regarding rising in share markets over the next six months.
About 25% of the traders who responded cited the Coronavirus pandemic as the factor that was most influencing in their six-month outlook for stocks.
A strong earnings season in the US meant that risk was back on the table. With risk appetite running wild last week traders moved away from safe assets such as gold, resulting in gold recording its first weekly loss in five weeks.
The yellow metal is expected to continue to trade around the US $1800 mark till Wednesday when US Federal Reserve policy is announced.
The dip in gold prices was not surprising given an increase in risk appetite. Having said that with bearish sentiment running low and long-dated Treasury bond yields running low is a bullish sign for the yellow metal.
Economic data, Fed policy expectations and news around current COVID strains though is expected to dominate the news in the coming weeks and as such may add to choppiness in both equities and gold.
Oil prices closed the week higher after a strong recovery from Monday’s steep slide. The price of oil tumbled by about 7% on Monday on concerns about the impact on the World economy and demand for oil with rising COVID19 cases in the US, Europe, Japan and Australia.
However as strong economic reports started to come from the US, oil traders realised some of the fears were exaggerated thus resulting in a recovery in oil prices. Even with OPEC+ nations agreeing to increase the supply of all, the latest economic growth numbers worldwide suggest the demand growth in oil is expected to outpace supply. As such we believe any dips in oil due to action by OPEC+ nations will be an opportunity for traders to buy and Brent oil should hit $100 per barrel next year with Crude oil tagging along the ride.
The Australian dollar continued to decline against the US dollar and the outlook for local currency looks darker as service sector contracts reduced for July.
There have been some downbeat economic data from Australia with manufacturing growth slowed according to PMI data, a plunge in business activity due to extended lockdowns in NSW and sharp services contraction.
Until recently, the Australian economic recovery was firing on all cylinders, a new wave of COVID 19 Delta variant however put brakes on all economic recovery. As per Treasurer Josh Frydenberg, the lockdown is costing the economy nearly $300 million per day and will likely impact the local currency going forward.
Having said that, looking at the technical outlook an uptick in the RSI hints that the downward slide in the Australian dollar may have been exhausted in the short term. This view will be validated if the MACD line crossing above the oscillator’s signal line, which looks likely to happen.
A break above USD 0.7413 can amplify the move upwards, however, with the long term trends remaining down there is a strong chance that traders will be looking for sell opportunities in rallies.
In regards to the Indian rupee, the Indian currency rallied early in the week as oil prices tumbled. However, as oil prices began to rise again the rupee started to tumble again against most currencies. With India being the second highest importer of oil, any rise in oil prices hurt Indian currency. Last year worked to contain USD/INR within the 72-75 range. Rising inflation and continuously increasing oil prices though are adding to growing problems for RBI.
Usually, a rise in oil prices and equity markets tend to make other risk currencies move higher, however, it seems currency traders are not losing sight of the overriding trend fuelled by stimulus packages and looking to diversify.
This can be seen across all financial markets, with the US, German and Australian equities trading at record peaks. China consolidating from their peaks.
Oil rebounding after a 7% fall on Monday, palm oil rocketing towards record highs and LNG surging.
A rise in COVID19 cases though has resulted in traders selling risky currencies, shorting Asian currencies, slashing bullish bets on the Canadian Dollar, and shorting commodity-based currencies such as the Australian dollar and Mexican Peso.
The Turkish Lira is remarkably stable and the Russian Ruble and Chinese Yuan doing well especially against funding currencies such as Euro and Japanese yen.
All these factors indicate that the traders are diversifying their portfolios and keeping a close eye on pandemic crises and using periods of doubt by high-yield currencies to take advantage of quiet periods when there is a drop in volatility.
In the world of Cryptocurrencies, Bitcoin rallied strongly after Elon Mus said Tesla is most likely to start accepting it as payment again. Elon Musk also addressed concerns that he had helped to artificially increase the price of cryptocurrencies before selling them.
The strong bounce meant that Bitcoin is out of the Bollinger downward channel we spoke about previously with support now sitting at $31,464. Technically, a close above USD 34,182 on Thursday engaged the Bollinger uptrend channel while also clearing the Ichomoku cloud base at $33,745.
Ethereum also jumped off allow of $1,717 on Wednesday to a peak of USD2180, up 25% in 4 days. If the buying pressure persists the bulls can aim for a June 29 high of $36,600 for Bitcoin, with some resistance provided at a 50% retracement level of $35,618.
However, with the long term trends still looking flat to down it will be interesting to see if this run-up will be an explosive rally like yearly this year or will fizzle and burn.
In agricultural products, we have been talking about the impact of weather events and how traders will be keeping an eye on it.
Our last report talked about how a drier and hotter than normal summer resulted in reduced supplies and a rally in corn, wheat, and soybean prices.
However, this week, a change in weather forecast on Friday that the heat is not staying for long and there are chances of extended rains in August resulted in farm markets trading lower on Friday. Dry weather in Russia, largest exporter of wheat in the world and, continued to support agricultural goods priesthoods.
As per Al Kluis, Kluis Advisors, “Investors are keeping a close eye on every updated weather forecast.”
Author: Ateev Dang is a trader and trading coach by profession. He runs Glow trades Pty Ltd where he teaches anyone interested in starting on their trading journey on how to trade. He can be contacted at adang@glowtrades.com.au.
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