27 May 2022 17:02
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Market Mantra: Australian shares expected to boom after IndAus trade agreement

Local markets are benefiting from the commodity price boom, triggered by the crisis in Ukraine and now are on a high with IndAus trade agreement.

The Australian share market rallied for a third consecutive week and is on course to hit a record high this year after a particularly strong March.

The ASX 200 benchmark was up an amazing 6.4% for March as it recovered quickly from the Russian invasion of Ukraine and rallied strongly on the back of higher energy and mining companies.

BHP is a great example of ASX recovery. The mining giant closed at $52.39 on Friday and with iron prices continuing to rise is well on the way to reclaiming its record high levels from last year.

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Iron prices continue to rise as China moves to stimulate its economy after the continuing effects of the pandemic and the Ukraine crisis.

In a sign of how much the local markets are benefiting from the commodity price boom, triggered by the crisis in Ukraine and the rolling impact of the pandemic, the energy and materials sector added close to 10% for the month.

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Image source: Grain Producers Australia

An announcement by US President Bidden that the US would be investing to boost the production of rare earth materials. The announcement immediately lifted stocks like Lynas Rare Earth, which has an existing relationship with the US Department of Defence, AVZ Minerals, and Allkem, both of them hitting record highs. AVZ has now risen more than 1000% over the past 12 months.

Unfortunately, not all shares were able to follow the market’s lead. Stocks in Imugene Limited dropped 7.4% last week. This was despite there being no news out of the biopharmaceutical company. Imugene shares have been in a downtrend currently and have declined 42% since the start of the year.

James Hardie’s share prices also tumbled 7.1% last week despite no news from the building materials company. James Hardie’s share prices have been under significant pressure since missing its third-quarter earnings in February. The company’s shares hit a 52-week low last week.

Looking ahead, the biggest event to watch this week will be the Reserve Bank board meeting, which will help solidify the course of official interest rates for the rest of the year.

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While the interest rates are not expected to move from the current 0.1% level, analysts are expecting some forward guidance to fight growing inflationary pressures.

The financial stocks are expected to benefit from the meeting as interest rate hikes positively impact the financial companies. 

Australian Banks; Reprentative picture @CANVA
Australian Banks; Reprentative picture @CANVA

Currently, the market is tipping a lot more interest rate rises than the RBA itself. As such the meeting this week will be crucial to see if it can bring the two parties closer together.

Gold prices declined for the week as a strong US Dollar and higher Treasury yields dented the appeal of non-yielding bullion.

US jobless rate improving to 3.6% in March further aided the decline in gold as it raised expectations of an interest rate rise in the US. 

A jobless rate of less than 4% is defined by the Federal Reserve as ‘full employment.’ The United States has technically had full employment since December when the unemployment rate fell to 3.9%.

Fed officials closely monitor monthly job growth to measure the health of the economy and to determine the necessary rate increases to limit inflation.

Now with inflation in the US at its highest level since 1982 and job openings hovering near record highs in February it is expected that the FOMC officials may consider a 50-basis point increase at the committee’s next two meetings in May and June to bring inflation back up to its target of 2%,

Technically speaking the gold rally looks to be nearing an end, with signs of trend consolidation and exhaustion coming in.

The 61.8% retracement of the yearly range at $1891 an ounce will be a key support level, a break of which can start a new downtrend for the yellow metal. The formation of an evening star on the weekly chart has further opened the door for a reversal potential.

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

The bearish sentiment for gold is further validated by the fact that gold is trading near $2000/oz level. A level at which traders tend to get very nervous. Historically, the bullion has only had one weekly close ever above the $2,000 level.

A rebound from $1895 levels could see the precious metal rebound to a 2021 high at $1959.

Oil notched its biggest weekly fall since April 2020 on news of the US stockpile release,

US President Joe Biden on Thursday announced a release of 1 million barrels per day (BPD) of crude oil for six months starting from May to control inflating oil prices. At 180 million barrels, this is the largest release ever from the US Strategic Petroleum Reserve (SPR).

Members of the International Energy Agency soon agreed to join in the largest-ever US oil reserves release, resulting in oil recording its worst weekly decline since 2020.

The US release of oil however still pales in comparison to the expectations that 3 million BPD of Russian oil will be shut in sanctions bite and buyers spurn purchases.

Oil prices also declined after China brought the commercial hub in Shanghai to a grounding halt on Friday after the government locked down most of the city’s 26 million residents, aiming to stop the spread of COVID19.

JPMorgan Bank said in a note that it had kept its price forecasts unchanged at $114 a barrel for the second quarter. They noted that releasing strategic reserves is not a persistent source of supply and if stranded Russian barrels average more than 1 million BPD. As per the bank, this will leave 2023 in a deep deficit and will keep oil prices above $100 per barrel.

The Australian dollar has gone back and forth all week to form a neutral candle for the trading week to show a bit of hesitation. This makes 0.7500 level of strong importance as it has a point of both support and resistance several times over the past few months.

The Australian Dollar has been one of the most resilient currencies against the greenback throughout the last quarter thanks to a broad commodity price rally and strong relations with China.

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

While the situation in Ukraine saw many global currencies deteriorate in favour of the safe-haven US Dollar, the Aussie flourished thus allowing RBA greater flexibility. The inflationary pressures in Australia remain comparatively muted to many of its US counterparts including the US, thus allowing RBA to keep the cash rate steady at 0.10% since late 2020.

While the RBA is expected to meet this week and RBA Governor Phillip Lowe voicing concerns around inflation, the fact is core inflation in Australia remains within the bank’s target band of 2-3% thus reducing the chances of an interest rate rise on Tuesday.

The rising commodity prices and Australia’s resistance to the current Ukrainian conflict should continue to buoy the local currency, especially if the war continues through Q2.

Having said that rising COVID19 cases in China have induced strict lockdowns from the Chinese government and could weigh on the AUD upside should the situation negatively impact Chinese growth, commodity prices and demand.

Technically speaking the AUD USD is currently forming a bullish flag on the weekly chart. A Bullish flag usually represents a bullish continuation and could bring into consideration levels beyond 0.7500 once broken. However, we would need to see a clear weekly candle close above flag resistance before considering going long.

On the daily chart, however, the situation is a bit different. The RSI index currently points down showing strong resistance at 0.7500. In the short-term, there seems to be a bearish divergence forming with prices turning lower from current levels before surging commodity prices and a strong economy eventually helping the Aussie to register a secondary rally higher.

The decline in oil prices helped stabilise the Indian Rupee against the American Dollar. However, the Indian currency ended the Indian financial year 3.5% lower.

It was truly a story of two halves for the Indian currency. During the first half of the financial year, the Indian currency strengthened on strong FDI inflows, cheap fuel prices, and high risk-on sentiment.

As the year progressed and the US Federal Reserve announced policy tightening the FIIs start withdrawing money from India. The Russia-Ukraine conflict then resulted in soaring fuel prices which then resulted in Rupee crashing to new all-time lows.

Reserve Bank Of Australia; Picture Source: @CANVA
Reserve Bank Of Australia; Picture Source: @CANVA

The RBI has since started selling dollars to absorb liquidity and not allow the Rupee to weaken further. The Ukraine war has taken oil prices beyond $100 per barrel, however, the RBI has managed well to not let the Rupee fall below 77.00 levels against its US counterpart.

With India’s foreign exchange reserve dropping by over $20 billion in the last six months the upside in Rupee remains capped. There are few headwinds for the Indian currency going forward, particularly if the crude prices stay higher. India imports 80% of its oil requirements and high crude prices will result in India’s current account deficit widening.

Furthermore, while the US Fed Reserve, as well as RBA, are expected to raise interest rates multiple times this year,  the rising account deficit means RBI will not be able to hike rates that easily. This could take Indian Rupee towards 78 to 78.50 against the US Dollar and towards 60 to 61 level against the Australian Dollar over the next six months.

Moving on to digital currencies. After a slow start to this year Bitcoin hit a 2022 high on Monday, Ethereum has posted big gains over the weekend and most of the Top 30 currencies have mooned over the last week.

BTC on Monday hit a 2022 high of $48,086, a price not seen since 31 December. At the time of writing the report the most traded digital currency had fallen slightly to trade near $46,500.

Ethereum though has not reached its 2022 high of $3,876 on January 4, however, it rose 12% over the last week to trade near the $3,500 level.

In the last seven days, most of the top 30 currencies have rocketed with Solana ballooning 39%, Terra Luna jumping up by 26%, Avalanche rallying 23%, NEAR Protocol adding 20%, and Tron going up by 16%. 

Anticipation of Ethereum 2.0 is believed to be one of the key factors behind the rally in Ethereum prices. Google searches for “Ethereum merge” hit an all-time high last week.

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

The Merge will be a moment later this year when Ethereum’s mainnet will merge with a proof-of-stake system called the beacon chain. It is expected that the merge will solve the network’s well-known scalability and energy consumption problems.

In agricultural products, there were a lot of reds on the price change table last week, meaning the Friday closes were below those from the previous Friday.

The grains started the month bullish with Wheat hitting 14-year highs and soy and corn both rallying. However, with wheat futures falling by 10.7% and corn and soy both declining too last week, the month went out like a bear. 

Corn and wheat were however still up $0.50 and $0.80 for March while soybean ended the month at $0.31 lower.

All three grains, however, extended the decline on April 1.

Traditionally speaking with warmer months starting in the Northern Hemisphere and the sowing season starting, the month of April is when grain prices start to go down.

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 how to trade. He can be contacted at [email protected].

Disclaimer: 

The writers’ opinions in the above article are their own and do not constitute any financial advice whatsoever. Nothing published by The Australia Today constitutes an investment recommendation, nor should any data or content publication be relied upon for providing any investment activities.

We strongly recommend that you perform your own independent research and/or speak with a financial advisor or qualified investment professional before making any financial decisions.

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