The Australian market snapped a positive three-week rise last week with tech and software stocks leading the losses as US Federal Reserve officials solidified expectations that the US interest rate could rise as soon as March, leaving markets braced for tighter monetary conditions.
It is becoming clearer by the minute that global central banks, including the US Federal Reserve and our own Reserve bank of Australia, are finally waking up and getting ready to try and control inflation by limiting bond purchases and raising interest rates. As such traders are getting jumpy about holding stocks.
There are also real-world negative business effects that are now starting to come through as a result of the latest round of COVID-19 infections and isolations. Qantas recently confirmed that it has scaled back flight operations by a third due to lack of demand. Crumbling supply chains have resulted in empty supermarket shelves resulting in consumer staples stocks falling every day for the week.
When the interest rates rise the tech stocks which usually rely on easy money are first to fall. The Australian tech sector was no different, declining 4% for the week. It was the Buy Now Pay Later stocks however which led the route. Sharp falls in Square Inc stocks in US trade and a negative report from Mcquarrie on BNPL meant shares in Afterpay, Zip, Openpay and Splitit as well as software supplier Xero had massive drops.
The banks and financials which usually benefit from rising interest rates were also unable to stem the rot this week and ended 1.2% lower for the week, after six consecutive weekly gains. Both Commonwealth and Westpac fell more than 1% while Pendal shares were down more than 16%.
Traders in Australia will be waiting nervously to see if Australian bond purchases will be cut when the RBA board reconvenes on Feb 1 after Jerome Powell left no room for doubt that he will tackle inflation hard after the US CPI for December came in at an annualised rate of 7%, the highest for almost 40 years.
With interest rates hikes expected soon we expect the tech sectors to continue to struggle in the near future, with more pains for holders of Buy Now Pay Later stocks. The financial sector may take their cues from the US in the short term, however, they may be heading into a headwind with traders waiting for RBA meeting at the beginning of February where we are expected to hear more on the speed of interest rate hikes in Australia.
Looking ahead to this week, traders will be waiting keenly for Australian unemployment figures for December. In November, Australia created a massive 366,000 + jobs. However given December was a tougher month than expected with more viral outbreaks across Australia, we wouldn’t be surprised if job numbers decline for the month.
Consumer confidence numbers, housing starts, payroll jobs and wages, skilled job vacancies and business turnover will also come out during this week. Investors will also be looking keenly at Chinese economic growth figures and figures on retail sales, production and investment.
Gold prices firmed strongly last week, supported by a retreating US Dollar. The Fed remarks on Friday however resulted in the yellow metal giving away some of the weekly gains. However, despite the declining gold still had its best week since 12 November.
The US Dollar fell to its lowest in more than two months last week while US 10-year Treasury deals also recorded their first weekly decline in four weeks. This helped the non-yielding yellow metal.
The bullion is usually considered as an inflation hedge, however, it benefits strongly from US Dollar weakness as that makes it cheaper for holders of other currencies.
Failure to breach the December peaks around 1830-1835 levels and Federal Reserve’s hawkish stance on Friday however then led to the decline in gold to close the week around the US $1818/ounce.
The big test for the precious metal would be to see if it cracks the $1830 level. This has proved to be a tough nut to crack for gold traders. If gold bulls do not find the strength to break through $1830, then the price could continue to remain range-bound between $1800 and $1830 as we have seen in the last few days.
Oil recorded a fourth consecutive week of gains, recording their longest winning streak since October. A weaker US Dollar and supply constraints boosted oil prices last week. A weaker US Dollar makes commodities more affordable for holders of other currencies. Hence, as US Dollar recorded its largest weekly fall in more than a year the crude prices rallied higher.
Analysts also warned that the recent Russia Ukraine conflict could be a seismic event for the energy market and may result in supply disruptions, thus sending oil prices higher. Russia is not only a major oil producer but with more European nations racing towards getting off fossil fuels the dependence on Russia as the major source of energy for Europe has increased manifold.
On Friday Russia began moving tanks and other military equipment westward towards Ukraine from its Far East bases. Also on Friday, an alleged cyberattack from Russia left a number of Ukrainian government websites unavailable. The emerging crisis between Russia and Ukraine raises political risk premium and directly affects the natural gas prices.
A possibility of an armed conflict also have wide geopolitical ramifications and boost oil premiums.
While oil prices look set to head towards US $100/barrel a potential release of crude from China’s strategic reserves and a weekly rise in the number of active US oil drilling rigs may spoil the party in the short term for the oil bulls.
As such we expect oil to take a breather around current levels before starting the climb again.
With US Dollar recording its largest fall in multiple months the Australian Dollar was a big beneficiary rallying to 0.7313, a fresh two-month high. However hawkish comments from Fed, particularly on Friday night undermined demand for the local currency against the greenback thus resulting in the Aussie trimming its gains to settle around the 0.7240 price zone.
The US continues to record inflation at toxic levels and with traders feeling that the US Federal Reserve is not being able to respond in a proper timed manner to the rising inflation the US currency got dumped heavily last week. The dollar however recovered some ground on Friday night after Fed Governor Lael Brainard became the latest and most senior US central banker to signal that interest rates will rise in March to combat inflation.
With US government bond yields, however, recording a decline for the week it seems the recovery in the greenback could be limited and positive macroeconomic figures from Australia last week could mean that the local currency may continue in its strong position.
The upcoming week however will be crucial for Australian currency as China, Australia’s largest trade partner will publish its December retail sales and industrial production and Q4 GDP figures.
Technically speaking the Australian Dollar tried to go above the 100 SMA, however, the sellers defended the levels strongly thus indicating that bears might still be in control for the AUD/USD pair.
While the falling US Dollar boosted the commodity prices which helped Australian commodity miners and in turn the local currency, the rising commodity prices especially oil meant the Indian Rupee continued to remain pressured against all currencies.
India is one of the largest oil importers and gains in the Rupee remains limited when oil prices go up. A widening trade deficit, lesser IPO’s and the prospect of a US rate hike are expected to subdue the INR in the coming weeks.
India’s trade deficit increased to a record $21.7 billion for December 2021. The trade deficit in India was $15.72 Billion during the same period in 2020 and $12.47 billion in December 2019.
India has also seen a surge in FII outflow in recent weeks and a rate hike in the US could further drive away FIIs from investment in India and other emerging markets.
The Indian Rupee is now the worst-performing currency in the Asian basket as India grapples with a surging trade deficit and inflation. However, USD/INR pair faces strong resistance between 74.40 and 74.70 regions.
In digital currencies Bitcoin after dropping 20% in the last two weeks turned the tide by getting above $43,100, up by 3% in the last 7 days.
Bitcoin started 2022 on a weak note and briefly dropped below US$40,000 for the first time since September last year. However, it quickly found support around these levels and reclaimed the key $42,000 level, a level that gives confidence to other altcoins.
With news from the crypto world continuing to be positive globally many top altcoins such as Polygon, Terra (Luna), Polkadot and Dogecoin gained more than 15% during the week.
In Agricultural products, soybean and corn futures recorded weekly declines on forecasts of rains in drought-hit South American growing regions. Wheat also recorded its third consecutive week of declines as the supply outlook improves.
Weather forecasts have shown parched areas of Argentina, the world’s top exporter of soy and the second-largest producer of corn may receive significant rainfall this week thus boosting chances of a better than previously expected crop.
For the wheat market, the International Grains Council raised its forecast for 2022 global production, partly driven by a strong outlook of the crop in Australia.
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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