Market Mantra: Australian shares at loss as miners and big banks sink

“At a time when the fierce competition in the key home loan market is hurting the banks' margins substantially, one can expect the financial sector to remain under pressure for quite some time.”

Australian shares marked a second straight weekly drop as a revised takeover bid for Crown resorts was unable to counter the slump in big banks and miners.

The Big Four banks led the decline on the share index for the week after Commonwealth Bank of Australia flagged margin pressures on Wednesday. Even though CBA did recover some of the lost ground on Friday, climbing by 1.3% after announcing its latest foray into cryptocurrency space and buying a stake in its crypto trading partner – Gemini, it was not enough to lift the financials for the week. Overall the financials recorded a decline of 3.6% for the week, it’s worse since October 2020.

According to Kunal Sawhney, CEO of Kalkine grou:

“At a time when the fierce competition in the key home loan market is hurting the banks margins substantially, one can expect the financial sector to remain under pressure for quite some time.”

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Usually a hike in interest rates help ease such margin pressures. The Reserve Bank, however, has made it clear that it is in no hurry to raise interest rates. As such an interest rate hike in the coming months seem highly unlikely.

Image source: Big Four oZ banks – Wikipedia.

The miners were also down 1.5% for the week as iron ore prices sank to an 18-month low last week on worries that weak demand for the steel-making ingredient in China, the world’s largest steel producer, will continue to persist beyond 2021.

However, it was a week where the troubled casino group Crown Resorts grabbed the headlines as it soared 17.1% to climb most in almost eight months after Blackstone group made a 6.2 billion takeover for the group. Investors in CWN have been doing it tough lately as the Royal Commission into the operations of the troubled casino found serious wrongdoings on a fairly widespread scale. As such confirmation of a higher offer from Blackstone will come as music to their ears. At the time of closing of trade on Friday, the shares in Crown casino were trading at $11.54, which is still below the offer price of $12.50.

Moving forward the traders will be monitoring the situation in Europe where the old CoVid-19 spooked the markets once again. On Friday night Austria became the first nation in Western Europe to reimpose a complete National lockdown again as coronavirus cases continue to rise. The German Health Minister Jens Span also said that the situation in Germany was so grave that the lockdown couldn’t be ruled out.

The news resulted in an immediate sell down of stocks in European and American sessions as investors fretted about renewed lockdowns. Banks and travel companies in Europe and US sessions bore the brunt of losses as investors worried about reduced economic activity if case numbers are to rise further and other nations go into lockdown again.

Since Friday night the focus has been changed from inflation back to CoVid-19. This week we believe news regarding CoVid-19 lockdowns in Europe will remain the headline and most of the trades in the market will be driven by COVID.

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Australian Gold; Picture Source: @CANVA
Australian Gold; Picture Source: @CANVA

The resurgent concerns about COVID-19 and looming lockdowns in Europe rattled the world markets on Friday night and pushed the investors towards safe havens. Gold was no different and edged higher for the week as rising inflationary pressures and renewed coronavirus restrictions in Europe clouded the growth outlook and boosted the appeal for the yellow metal as a safe haven.

According to Edward Meir, an analyst with ED&F Man Capital Markets:

“Gold has started focusing much more closely on the inflation picture and discounted the impact of stronger dollar and rising interest rates. There’s still a lot more monetary and fiscal stimulus in the pipeline that should keep the inflation fairly elevated and keep gold prices in turn high.”

The Gold prices, however, did take a bit of a tumble on Friday night after Federal Reserve Governor Christopher Waller called for early tapering of economic support to help chart a tighter monetary policy.

Fed speak has been a big catalyst for gold movements and as such gold traders will need to see what happens over the next couple of weeks before having any strong convictions in regards to what the Fed will do regarding interest rates.

Oil prices posted a fourth consecutive weekly drop last week and sank to a six-week low as new COVID lockdowns sparked demand concerns.

It was the first time since March 2020 that oil prices declined for four weeks in a row with US Crude Oil declining 4% alone on Friday on lockdown worries. Lockdowns sap demand for petroleum products as people are not moving around and businesses are closed. As such if the lockdown measures spread to the rest of Europe or even to nations outside Europe, it could tip the oil market into oversupply.

oil price going up; Picture Source: @Canva
oil price going up; Picture Source: @Canva

While the oil market remains in a good position with OPEC+ countries limiting the increase in supply, the lockdowns however will remain a risk for oil prices, especially if other nations decide to follow Austria’s lead.

In regards to the local currency, the Australian Dollar declined for a third week in a row as COVID risk aversion resurfaced with rising cases and lockdowns in Europe. Austria instituted a full national lockdown and Germany is contemplating a return to restrictions as rising coronavirus cases defy high vaccination rates in both countries.

The US dollar also gained strength against most other currencies including the Aussie as a potential rate divergence surfaced with the US Federal Reserve moving towards an early rate rise in 2022 and the Reserve Bank of Australia expecting no rate rise till 2024.

Looking forward the fundamental and technical outlook both do not favor AUD. While US Governor Lowe’s prediction of an earlier than expected rate rise weighs on the Aussie against the USD, weak demand from China and risk-off sentiment due to the coronavirus situation in Europe all impact Aussie negatively.

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

Technically speaking AUD/USD is resting on weak support and it looks like the 2021 low of 0.7130 from August would come into play. The MACD cross of the signal line below remains the dominant technical condition. The RSI has also moved lower, but not entered the oversold territory yet, thus suggesting there are more losses for the local currency ahead.

The Indian Rupee also came under pressure due to a surging US Dollar. However, it rose against the Australian Dollar as the INR showed a bit more resilience on the news that the Indian government expects the economy to grow by 105% in the current fiscal year as the economy rebounds from the pandemic.

The traders in Indian currency will now turn their focus to RBI which is expected to announce India’s foreign reserves this week. The traders will also be cautious amidst rising coronavirus cases in Europe and the economic impact of new restrictions.

Indian-Rupee; Picture Source: @CANVA
Indian-Rupee; Picture Source: @CANVA

In the world of cryptocurrencies, the crypto market stumbled and stabilised as Bitcoin’s Taproot network update went live last week.

Bitcoin went into a meltdown last week reaching a monthly low of US $56,000 on Thursday. It has since recovered some of the lost ground to be trading around $58,500 at the time of writing the report, recording an 8% weekly decline.

In a report from Coin Market Cap, the crypto market capitalisation stood at the US $2.6 Trillion last week. Both BTC and Ethereum despite the recent declines have gained twofold and sixfold respectively this year.

In terms of money inflows, despite an 8% decline in prices last week money continues to flow into Bitcoin. Capital inflow into Bitcoin hit an all-time high of $9 billion this year, with $151 million inflowing into Bitcoin last week, its thirteenth consecutive week of inflows.

The latest price swings follow plans by the Biden administration report proposing new legislation to regulate stable coins. The infrastructure bill signed by US President-elect includes provisions that firm up tax reporting requirements for cryptocurrency exchanges, which has big implications for crypto investors.

In positive news for the cryptocurrencies however Indian Government, which for long has opposed digital currencies is reportedly planning to introduce a new legal framework around crypto by early next year with classifications on usage, treatment of crypto as well as income tax and GST implications to be detailed.

In agricultural products, wheat prices continue to rally near multi-year highs as rumours of fresh sales of French wheat to China reinforced expectations of tight wheat supplies in major exporting areas.

A tender of 130,000 tonnes of animal feed wheat issued by the Philippines and International Grains Council cutting its forecast for 2021/22 wheat production further helped wheat prices.

The prices of soybean and corn however fell after a strong harvest season in the US. The demand for soybean, however, remains strong from ethanol producers and it is expected any decline is only temporary as with wheat in tight supplies, there is plenty of support for future grain prices.

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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