Australian shares dropped to their lowest level in four months on persistent worries about rising inflation in Europe and the USA and uncertainty surrounding Chinese property giant Evergrande.
The Australian shares recorded a fourth consecutive week of decline the local market has pretty much given away all the gains it has made since early June.
A slew of weak economic data from China and the surprise resignation of Gladys Berejiklian due to the ICAC investigation added to uncertainty. Historically the month of October has seen some of the most famous market routes and the start of October this year was no different with the unwelcome fall of 2% on Friday accounting for most of the 2.1% weekly fall last week.
Australia’s biggest trading partner, China, is also in the middle of a power crunch which resulted in a surprise decline in Chinese factory activity in September. This, in turn, is expected to impact the resources and minerals sector in Australia which rely heavily on the demand for raw materials from China.
A softening property market in China amidst Evergrande missing another $180 million payment o foreign US bondholders also dealt a fresh flow to Australian shares with both financials and miners feeling the pain.
The ill-timed surprise resignation of the NSW Premier on Friday have also added to uncertainty in Australian markets. With NSW in the middle of a crucial re-opening phase, it will be important for the new Premier to hit the road running.
However, amongst all the gloom there were some bright points with the Australian PM announcing Australia’s opening plan. The announcement sent travel stocks higher with Hello World leading the rally. The power shortage in China has also helped push the price of thermal coal to record high, thus helping coal miners in Australia. Whitehaven Coal was the biggest benefactor of rising coal prices and added a handy 4% to its value.
The Australian gold miners also ended in the positive as gold prices rose on inflation fears. Newcrest Mining, Northern Star Resources and Evolution all rose healthily throughout the week.
Looking ahead at this week will be a big week with the Reserve Bank of Australia meeting on Tuesday. While no change is expected to historic low-interest rates of 0.1% the investors would still be on edge to hear about the Board’s view on the Australian economy. Other important data that will impact market movement this week will be the job advertisements, construction data, car sales data, jobs and wages data, services data and finally Reserve Bank’s semi-annual Financial Stability Review.
While it seems this week the market will try and recover some of its recent losses there still seems to be a lot of uncertainty regarding Australia’s economic reopening plan amidst rising Covid-19 cases.
In regards to gold, worries about rising inflation and risks to global growth helped the yellow metal record its first weekly gain since 03 September. Gold is often seen as a hedge against the inflation and falling stocks in Asia and Europe on inflation worries and a possible slowdown in growth sent investors back into precious metal.
A dip in the US Dollar against a basket of other currencies and lower bond yields also added to appeal for gold. The continuing rise in energy prices in China and Europe and growth concerns in China will support gold. However, prospects that the US may wind down on fiscal stimulus this year may yet pressure gold.
Oil continued to rally for a fifth consecutive week with international oi benchmark Brent Crude hitting US$80 per barrel for the first time since October 2018. With both US Crude and Brent recording another week of gains, oil has now added more than 50% in prices for 2021.
There is a persistent supply deficit with OECD countries not increasing supply even as economies open up have aided oil prices. As oil continues to rally, Goldman Sachs hiked its target price for Brent from $80 by the end of the year to $90 by the end of the year.
In April 2020 when the pandemic hit and oil prices moved into negative territory, OPEC countries announced historical cuts in oil productions and removed nearly 10 million barrels per day from the market. However, with most economies now opening up the OPEC nations continue to hold back oil production. As such while demand for oil has since recovered the supply remains constrained.
The rise in oil prices and supply concerns have also forced nations to switch to other energy sources to meet the demand and have thus resulted in a rally in gas prices with Natural Gas Futures reaching their highest levels in the last 7.5 years. The price of Natural gas is up 40% alone in September with gas usage expected to increase as Northern Hemisphere heads into the winter season.
In a volatile week for the local currency, the Australian dollar hit a four week low before steadying during the end of the week and rallying on Friday to close the week on a high. A 6.6% rise in building permits in August, a 0.6% rise in a month on month Private Sector Credit and the announcement that NSW will ease restrictions for fully vaccinated persons earlier than expected all combined to improve sentiment towards the Australian Dollar.
However, with retail recording, a fifth consecutive monthly decline and uncertainty due to rising delta cases the Australian growth is expected to have a major hit. Traders will be waiting for GDP data to analyse the state of the local economy. It is widely expected that the GDP for the September quarter will show negative growth, which it does will start another decline for the Australian dollar.
In regards to the Indian Rupee, the rising oil prices resulted in Indian currency slipping against other major currencies. While Indian factory data expanded in September signalling economic recovery the employment data showing firms reduced headcount at the fastest pace since May.
India has a 77% dependence on oil imports and a rise in oil prices impacts the rupee negatively. With oil prices rising to their highest prices since October 2018, the Rupee slid below the 74.00 mark against the US Dollar.
In the world of Cryptocurrencies, the crypto investments picked up once again with investors buying the dip. Even though China once again reiterated that all crypto-related activities are illegal, a report from IMF stating investments in cryptocurrencies are growing at an unbounded rate, especially in emerging countries helped cryptocurrencies recover some of their recent losses.
While September had not been a good month for the cryptocurrencies with Ether recording a 16% decline for the month and Bitcoin losing 7%, the pullback is expected in light of the rally over the last 12 months.
Ethereum alone have added roughly 830% to its value in the last 12 months and the 9% rally on Friday night signals the currencies are ready to enter a bullish cycle again after the recent dip.
With Ethereum though still struggling with high transaction fees and slow network speed, we feel that some of the other coins such as Cardano or Solana dubbed as Ethereum killers may provide a better value for crypto investors.
Solana, which as per its company website processes 50,000 transactions per second compared to Ethereum which is limited to 13 transactions per second have already rallied 4,800% since September 2020. For investors looking to diversify from Bitcoin and Ethereum, we feel Cardano, Solana, Matic, Polygon and Tezos provide a great alternative.
In agricultural products, it was a mixed week. Wheat futures climbed to a six week high on tight supply concerns. Corn followed wheat higher. Soy however dropped after US data showed larger than expected soy inventories in the US.
With wheat stocks at a 14 year low in the US as per the report from USDA and also a decline in production wheat is in very tight supply and could lead the gains in grain prices till a new cycle of crops is available for exports.
Author: Ateev Dang is a trader and trading coach by profession. He runs a business called Glow trades Pty Ltd where he teaches anyone interested in starting their trading journey on how to trade. He can be contacted at adang@glowtrades.com.au.
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