Market Mantra: Shares market fall while Australian dollar rises on inflation concerns

Speculations of an interest rate rise due to rising worries, the upcoming RBA meeting on Melbourne Cup day will be particularly important.

Australian shares ended the week lower on growing concerns over rising inflation in the country with technology, financial and energy stocks leading the losses.

The equity market recorded its worst week in four with sentiment battered by inflationary concerns in Australian markets after the island nation recorded an increase in core inflation to a six-year high level during the third quarter.

Most sectors ended in red as market lost steam after the inflation data was released on Wednesday. That RBA then also skipped a key 2024 bond purchase on Thursday spooked the markets further, with technology stocks being the hardest hit.

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Rising interest rates will not only be bad for the home buyers when they flow through, the first place where they hit is the share markets as people withdraw money from shares and put in higher interest-paying accounts.

Surprisingly though, the banks which usually benefit from an interest rate rise were also sold across Australia on inflation worries.

With oil prices also taking a breather and oil recording its first down week since August negatively impacted the energy index. Miners were also down on weaker commodity prices with China’s attempts to limit coal prices sending shudders through markets.

Given the market weakness last week, which was inspired by speculations of an interest rate rise due to rising worries, the upcoming RBA meeting on Melbourne Cup day will be particularly important.

Historical the Melbourne Cup meeting has produced surprises more often than other meetings and we believe this will be no different with Reserve Bank in our view watering down any rate rise expectations till 2024. With US markets also closing on a record high on Friday we expect the positive momentum to flow into Australian equity market.

In regards to gold, gold prices declined as rising US Bond yields and a stronger US Dollar weighed the precious metal down. Even rising inflation concerns was unable to provide any support to declining gold prices.

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Gold is often considered an inflation hedge, a rising interest rates tends to push bond yields higher and with US dollar also rising it dents the appeal of non-yielding yellow metal.

Technically speaking the outlook for gold remains neutral. The resistance at 1813 remain strong and it seems the price for gold will continue to drift lower until the resistance is properly challenged.

This week the gold investors will be closely keeping eyes on Fed meeting on 02 and 03 November where US Federal Reserve is expected to announce when it will start tapering.Oil recorded its first weekly loss in 10 weeks after a rise in US crude inventory and the prospect of more supply from Iran eased supply concerns.

Iran last week stated that talks on reviving the international deal on its nuclear programme will restart by the end of November. The expectation of nuclear talks being resumed with Iran increased expectations that this will bring Iran a step closer in boosting its oil exports.

US crude stocks also recorded a 4.3 million barrel rise in this week’s report and hence eased concerns about shortage of oil, at least temporarily to some extent.

Oil has surged in 2021 as economies open up after being hit with the COVID 19 pandemic and OPEC+ not increasing supply on fear of future lockdowns. Algeria said on Thursday that crude output by OPEC+ should not exceed 400,000 barrels per day because of continuing pandemic related uncertainties and risks. Thus raising concerns that oil is heading for $100 per barrel.

However with US, India and Japan officials asking for more crude supplies amid global power crisis all eyes will be on OPEC+ meeting on 04 November.

In regards to the local currency, the Australian Dollar rallied for a fifth consecutive week Aussie enjoying CPI-led gains. A moderate annualised growth rate of 2% in the US, down from 6.7% in the previous quarter also boosted the Australian currency against the greenback with investors speculating that a weak US economic performance will delay Federal Reserve’s decision to taper with interest rates in the US.

In Australia the CPI jumped at 2.1% for the third quarter, up from 1.6% from previous quarter.  The market participants immediately rushed to speculation after the news that the Australian Reserve Bank will hike interest rates sooner than expected, this despite the RBA confirming previously that rates will not change till at least 2024.

Retail sales in Australia also increased 1.3% in September compared to expected 0.2%, providing further boost to the local currency.

The Indian Rupee on the other hand continued to decline against the greenback on the risk averse sentiment and concerns about high oil prices. With India facing energy crisis and demand for oil continuing the grow, continuous high prices have continued to impact the Indian rupee negatively.

Currently the US market is sitting at 75 level against the Indian Rupee. The 75 level has been a bit of cap for the buyers and Reserve Bank of India tends to be very aggressive to bring the price down between 72 and 75 when this level breaks. As such with the greenback testing this level it will be interesting to see how the RBI allows things to move from here.

In the world of cryptocurrencies, Bitcoin is trading around the US $60,000 mark at time of writing this report. The digital currency witnessed a slight correction after hitting a new all-time high of $66,999.Despite the correction the momentum for Bitcoin largely remains bullish with ETF approval, ETF launch and FDIC chair indicating that the agency is working to establish clear guidelines on the intersection between crypto and the US banking world. However, having said that there is a strong resistance at $67,000 mark with the asset correcting by almost 14% to hit the weekly low of $57,653.

Ethereum on the other hand had another week of significant rally. Ether broke through stiff resistance at US $4,000 and reached all time high of $4,401. ETH has been up by 25% in October and is trading in an uptrend with rising moving averages and relative strength index (RSI) in the positive territory indicating that the buyers have an upper hand.

In regards to other altcoins Polygon has been the one that have grabbed our attention of late. Over the last two weeks Polygon has surged by about 35% and volumes have increased significantly too. With chart patterns now forming a bullish flag we believe Polygon could hit US$ 3 by end of the year.

Similarly BAT token has been gaining significant traction in the crypto community too. The Brave browser, which acts as backbone for BAT, has seen a mammoth rise in its user base. This has significantly contributed to the asset’s appreciation of late.

In agricultural products, corn futures continued to rise to hit a two and a half month peak as harvest slowdowns across the Midwest left users scrambling for supplies.The rainy weather in US has caused delays in harvesting in the US and this has boosted prices for both corn and soybeans.

The wheat prices also continued to rally to reach multi-year highs. Strong import demand, poor spring wheat harvest and an export duty by Russia, world’s largest wheat exporter, have heightened concerns about relatively tight wheat supplies this season.

The rising fertiliser prices have also added to the supply concerns. The rising fertiliser prices in US have markets concerned that the farmers may not have planted as much grains, which could make food prices go up further.There are talks of strategic reserve type situation with many world buyers stocking up on various grains in anticipation of a food shortage in the near future.

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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