Australian shares swung wildly last week from reaching four month highs to plunging most in 16 months and then rebounding on Friday to close 0.1% higher for the week.
2022 started on a mixed note for Australian investors with energy stocks soaring on increasing oil prices while technology stocks tanking amid increasing Omicron cases.
The market opened the week on a positive note, however after the minutes of US Federal Reserve signalled an earlier than expected rate hike it resulted in Australian shares posting their biggest drop since September 2020. The technology shares which usually rely on cheap and easy money were hardest hit.
The buy now pay later companies such as Afterpay and Zip led the declines with many analysts believing that an interest rate rise would reduce the present value of tech companies expected future profits.
Shares in James Hardie also declined after the company sacked its Chief Executive Officer for work related interactions and breach of conduct.
The markets, however rebounded to recover some of the losses on Friday as financial stocks led the gain. Propelled by the Big Four the financial stocks jumped by 2.2% on Friday, recording their biggest intraday jump since October last year.
Even though the rise on Friday may have calmed some of investor concerns, rising Omicron cases and prospects of earlier than expected rate rise remain a worry for investors.
The week also brought some good news for private health insurers. With NSW and Victoria both now suspending elective surgery to combat with rising Omicron cases the shares in Medibank, NIB Holdings, QBE, SUN and Insurance Australia Group all galloped.
Moving ahead we feel as the health system remains under pressure the governments will need to bring in more restriction which should further help insurance companies.
Looking forward, investors will be keeping an eye out on national spending data. There is a concern that national spending in Australia has declined to lockdown levels with people in Sydney and Melbourne dragging the national spending as surging coronavirus cases keep them from going out.
With US Central Bank bracing for a hike in interest rate it lessened gold’s appeal as a non-yielding asset. The yellow metal declined 2% for the week, their biggest weekly drop since November 26 as US 10-year Treasury yields reached their highest levels since Mach 2021.
The precious metal is highly sensitive to rising US interest rates, which increases the holding cost for the non-yielding bullion.
Looking forward while it has been a bearish week for the gold the support around 1780 seem to be holding. A break of 1780 will open up risk of bullion tumbling to 1750s in the coming weeks. Whereas if the bulls manage to hold the support they may push prices of the precious metal back towards $1830/ounce.
We feel in the near and longer term markets will continue to pencil in a Fed balance sheet runoff, which should continue to push real rates higher and weigh on gold prices. For spot gold’s losses to accelerate the US Dollar is the key and would need to rise further from its current levels.
If the US Dollar starts kicking higher this week, that combined with higher real yields could be a big bearish risk for gold.
Oil prices recorded a third consecutive week of gains as the market tightened due to supply constraints across OPEC+ members following civil unrest. Kazakhstan’s largest oil producer reduced output following protests in the country, while production in Libya has also been hampered following militia unrest.
The OPEC+ alliance stuck with a scheduled increase of 400,000 barrels a day for February, however given declined output in Libya and Kazakhstan and Russia also failing to boost output last month it is highly unlikely that the group will meet that threshold.
Oil has rallied in past weeks as markets have largely dismissed Omicron as a mild strain and just a temporary aberration and now the supply interruptions from Libya and Kazakhstan have just added to oil bullishness.
A deep freeze in Canada and northern parts of USA have also disrupted oil flows last week.
We expect the bullish pattern in oil to continue over the coming weeks with US Crude Oil set to test key resistance levels at $80 per barrel.
Moving on to currency markets, the Australian dollar drifted lower against the US dollar as the US Fed Reserve signalled an earlier than expected interest rate rise.
With Australian macro calendar remaining empty during last week the news from US drove the currency pair. The FOMC meeting minutes on Wednesday night shook the world markets and the Australian currency by hinting that conditions of a rate hike could be met relatively soon, supporting speculation of a hike in March.
The Fed members also began discussing reduction of their bond holdings in the upcoming months. US policymakers have tried to cool down inflation related concerns throughout most of 2021 and the FOMC minutes on Wednesday further indicated that they are far more concerned than what they actually say and that they are ready to take more aggressive measures to bring things back under control.
The Reserve Bank of Australia in contrast is in opposite extreme to the US Central Bank. The RBA insist that a rate hike is unlikely, at least till 2024and that it is only a matter of time that inflation will return to acceptable levels.
Such imbalances between central banks would favour a slide in the Aussie against the greenback in the mid-term.
The Indian Rupee also declined against the rising greenback with concerns over the rising Omicron variant and firm crude oil prices weighed on the Indian currency. The foreign institutional investors also continue to be net sellers in the Indian capital market.
In digital currencies Bitccoil and cryptocurrency prices continue their sell-off with BTC briefly bottoming just below US $41,000.
This is Bitcoin’s worst weekly drop since November. The rest of cryptocurrency market also gave in to the selling sentiment with Ethereum, Binance coin, Solana, Cardano, Shibu all sinking.
There are two main reasons why the cryptocurrency prices are going south. First a possibility of an interest rate hike at the next Fed meeting in March. Rate hikes don’t bode well for non-yielding BTC.
The price action for digital currencies also indicate that they behave more like a tech stock than safe-haven assets and an interest rate hike usually hits the tech stocks hardest.
Secondly, unrest in Kazakhstan, which became world’s second biggest mining hub after China’s crypto crackdown. The civil unrest in Kazakhstan last week brought 18% of the global crypto mining facility to a grinding halt.
According to Antoni Trenchev, founder of crypto lending platform Nexo, if the Bitcoin price breaks below $40,000 it could get ugly with the number one digital currency possibly tumbling to September lows of $30,000.
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 on how to trade. He can be contacted on adang@glowtrades.com.au.
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