27 May 2022 16:16
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Market Mantra: ASX records third straight weekly gain on strong earnings

Gold recorded its best week in nine months as mounting tensions between Russia and the Western World over Ukraine lifted bullion’s safe-haven appeal.

Buoyed by strong earnings in blue-chip stocks Australian shares rose for the third week in a row. Global worries about a potential Russian invasion of Ukraine however took away some shine from the equities market as it sent the Australian share market down by 1% on Friday.

The ASX however, despite dropping 1% on Friday still managed to advance 0.1% for the week. Buoyed by CSL’s excellent profit performance health stocks were the best performer for the week.

The tech shares however continued to lose ground as Nasdaq extended its plunge and investors looked for safer havens. The Nasdaq composite index in fact produced a death-cross chart pattern on Friday night for the first time in two years.

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A death cross appears when the 50-day moving average crosses below the 200-day moving average. An event that many technical analysts view as marking the spot a shorter-term correction morphs into a longer-term downtrend.

The occurrence of death cross on Nasdaq signals more pain ahead for technology stockholders in the near short term.

Market-Mantra-Nasdaq
Market-Mantra-Nasdaq

Shares in ZIP were particularly hit hard, falling to their yearly low last week. Zip shares are now down more than 80% from their highs almost a year ago. The BNPL sector has continued to face crunch as banks prepare to raise interest rates and regulatory concerns mount.

There was also little respite for miners last week as shares slid after China’s benchmark iron ore futures declined for four straight sessions on fear of government intervention.

Also in the decline was shares in Origin energy which declined heavily as investors digested the news that it was going to close Australia’s biggest power plant, Eraring, many years earlier than planned.

With the threat of conflict brewing between Russia and Ukraine, gold prices rallied this week as investors flocked to safe-haven commodities. This provided a tailwind for ASX listed gold producers such as Bellevue Gold, Silver Lake Resources, Northern Star Resources. The gold stocks stood tall all week to offset weakness from the tech sector.

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The biggest impact on the share market last week however came from CSL which had a stellar week. The company’s half-yearly results were better than expected and CSL’s influenza vaccine division had a bumper half, ensuring group revenue lifted.

Treasury Wines and NRW Holdings also rallied on strong half-yearly 22 results. NWH was not only able to reduce debt by more than $130 million but also lifted its interim dividend by 37%, thus delighting its shareholders.

Image source: Big Four OZ banks - Wikipedia.
Image source: Big Four OZ banks – Wikipedia.

Reporting season was also friendly to Magellan, which not only beat profit expectations but went on to announce higher dividends for shareholders, Orora, Bendigo & Adelaide Bank, SG Fleet Group and JB Hi-Fi.

Moving ahead military action or otherwise around the Russia-Ukraine border will be the main driving force for markets during the week. Traders will also be looking at wage rise statistics.

It is expected that the Wage Price Index to be released on coming Wednesday by the Australian Bureau of Statistics will show a 2.5% rise in wages for the year, which is short of the 3% target eyed by the Reserve Bank of Australia.

The US estimates of economic growth and inflation, released on Thursday and Friday will also be a focus for markets during the week.

Continuing profit reporting season will also play a big role in direction of the Australian share market during the week with reports from Blue Scope Steel, Rio Tinto, Seven Group, Cochlear, Woolworths, Nine entertainment, Qantas, Medibank and Coles all coming out.

Gold recorded its best week in nine months as mounting tensions between Russia and the Western World over Ukraine lifted bullion’s safe-haven appeal.

One of the deepest crises in post-Cold War relations is playing out in Europe with Russia wanting security guarantees including Ukraine never joining NATO, and the US and its allies offering arms control and confidence-building measures.

While many Western countries including the USA are adamant that the military build-up on the Ukraine border by Russia is continuing ahead of a possible assault, Russia has been accusing the West of hysteria.

Escalating tensions between Moscow and Western countries over Ukraine and the possibility of sanctions on Russia could impact supplies of key commodities produced and exported by Russia, including gold.

Gold; Image Source: @CANVA
Gold; Image Source: @CANVA

Having said that, even though gold looks extremely positive heading into the week we expect that the US-Russia meeting slated for this week will likely keep a lid on gold gains. US secretary of state Antony Blinken agreed to a meeting with Russia’s foreign minister Sergei Lavrov, boosting hopes of an end to the standoff.

We may see gold range trade between $1870 and $1902 this week as traders wait for the result of talks between Russia and the US over the Ukraine crisis. Having said that if the tensions continue to escalate we may see the yellow metal rally all the way to $1950/ounce.

Oil prices ended the week mixed with London Brent Crude gaining 0.9% for the week, recording their ninth straight weekly rise as investors weighed a supply disruption resulting from the Russia Ukraine crisis, while WTI Crude falling 1.7% for the week, snapping their eight-week rally as traders collect profit ahead of President Day holiday on Monday in the US.

Fears over supply disruptions resulting from the Russian military presence at Ukraine’s borders help offset the loss from prospects of easing oil sanctions against Iran. The West has threatened Russia, a top gas and oil supplier, with strong sanctions if it attacks Ukraine, Russia on the other hand denies planning any attacks.

Looking ahead despite Italian Prime Minister Mario Draghi stating that any sanctions that may be imposed on Russia by the European Union should not include energy imports, we expect oil prices to rise on Monday following comments from US President in after-hours that he was convinced Russian President Vladimir Putin had made a decision to invade Ukraine in coming days.

Underpinned by Australia’s re-opening after a long period of restrictive measures and significant dropping of COVID cases nationally, the Australian Dollar recorded its third straight weekly gain.

Australian-Dollar; Picture Source: @CANVA
Australian-Dollar; Picture Source: @CANVA

Rising gold prices also helped the Aussie, making it the best performing currency of the past week. Many analysts believe that tensions in Eastern Europe could in fact be beneficial for the Australian Dollar via the terms of the trade route.

If Russia were to invade Ukraine, it is expected that strong sanctions from G7 nations on Russian exports should soon follow. Such sanctions would in return have a serious impact on the supply of several commodities in the global markets.

Russia is the world’s biggest exporter of natural gas and wheat, the second-largest exporter of oil, and also a major exporter of a lot of minerals including a lot of iron and gold.

If other countries decide to penalise Russia with sanctions it is expected to push up the price of goods that Australia exports. As such fighting in Ukraine might well be beneficial for the currency Down Under as long as it doesn’t impact the Chinese housing market negatively.

The Indian Rupee on the other hand remained subdued as high crude oil prices along with a wider monthly trade deficit impacted the Asian nation.

The latest official data showed that India’s trade deficit widened by 20.23% on a year-on-year basis to $17.42 billion in January 2022.

The $18 billion per month trade deficit is expected to keep strength in Ruppe in check. Inflation is also expected to be sticky with domestic fuel prices awaiting a big hike. The price of Brent Crude has hovered above $91/barrel all week. India has an 80% dependency on oil imports.

Foreign portfolio investors withdrawing from Indian markets have also further subdued the Indian currency. FPI’s have withdrawn Rs 18,856 crore from the Indian market in February so far amid geopolitical tensions and chances of a rate hike by the US Federal Reserve.

Moving on to digital currencies, Bitcoin dropped more than 6% last week as the standoff between Russia and Ukraine continues to spook investors globally. Bitcoin briefly rallied to $44,500 mid-week before escalating invasion fears affected financial markets. BTC is now trading below the psychological level of $40,000.

Bitcoin’s price movement also impacted other major crypto assets. Ethereum shed nearly 8% this week to trade around $2,600 level at the time of writing the report. In fact, all the top 20 cryptocurrencies except Avalanche declined for the week. Avalanche recorded a 3% rise on the weekly timeframe.

Bitcoin; Picture Source: @CANVA
Bitcoin; Picture Source: @CANVA

Moving ahead the crypto markets look very uncertain over the next few weeks as Russia-Ukraine border tensions continue.

In agricultural products, the grains market continued to rally as grain traders try to determine if or when Russia may invade Ukraine. Russia is the world’s largest exporter of wheat and there are serious supply concerns if Western nations were to put sanctions on Russia.

Corn and soybean too rallied despite improved weather in Brazil and Argentina as the Bidden administration announced that Russian aggression was imminent. The threat of war between Russia and Ukraine continues with the Russian military announcing massive nuclear drills.

Author: Ateev Dang is a trader and trading coach by profession. He runs a business called Glow trades Pty Ltd where he teaches anyone who is interested in starting their trading journey how to trade. He can be contacted at [email protected].

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