Market Mantra: Australian shares record worse week in more than a year but why?

However, Gold gained for a second consecutive week as rising inflation and geopolitical risks lifted its safe-haven appeal.

The Australian market wrapped up its worst week in more than a year, hurt by lingering concerns over US Federal Reserve tightening and weaker than expected economic data from China.

Led down by miners with Whitehaven Coal slumping after cutting its forecast for 2022 and Rio Tinto falling after Serbia revoked its lithium exploration licences the ASX 200 declined 3% last week, recording its biggest weekly fall since October 2020.

The loss in ASX was much bigger than the US market slump which saw the Dow Jones lose 0.95%, S&P 500 shedding 1.1% and Nasdaq 100 dropping 1.3% for the week.

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Shares of Rio, BHP and Fortescue all lost heavily for the week with Serbia cancelling Rio Tinto’s exploration licences on environmental grounds, whereas investors in Sydney and London approved plans to scrap BHP’s dual listing on Thursday.

Western Australia cancelling plans to reopen its border on 05 February due to risks from Omicron CoVid19 variant also weighed on miners resulting in them plunging 3.8% for the week, their first weekly decline after eight straight weeks of gain.

Energy stocks which were rose for most of last week also saw heavy selling on Friday, losing 3% in their worst session since 20 December, thus giving up all gains it made during the rest of the week.

As we mentioned before the tech stocks continued to get sold heavily this week with Buy Now Pay Later stocks leading to the losses. Afterpay wrapped up its final day of trading on Wednesday, before becoming Block on Thursday. Pay-day lending outfit Before also made its debut on ASX last week, however, its stock price plummeted by more than 44% of its initial offer price on the first day itself.

Afterpay; Image Source: CANVA
Afterpay; Image Source: CANVA

With most central banks across the globe looking at interest rate hikes to counter rising inflation, the Australian investors will be waiting anxiously for next week’s RBA meeting. The meeting will be important to assess the central bank’s views on inflation.

Before that, however, this week the December quarter numbers to be released on Wednesday, a day when markets are closed due to the Australia Day holiday, will be crucial.

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With most analysts tipping CPI to increase due to higher prices for food, petrol and clothing it would be important to note if it stays between the RBA comfort range of 2% to 3%. While most analysts expect the CPI to stay at about 2.5% we expect it to likely be lifted to 3.2% due to rising costs.

Overseas the US Federal Reserve meeting on Tuesday and Wednesday and US inflation numbers n Thursday are the big things to watch for.

Gold gained for a second consecutive week as rising inflation and geopolitical risks lifted its safe-haven appeal.

With the market focus now strongly on the US Federal Reserve meeting on 25 and 26 January, there was a very clear flight to safety towards gold from a lot of traders.

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

Gold bulls also benefited as investors sought cover from worries about a possible extension of US sanctions or new EU measures if Russia attacks Ukraine.

With gold looking bullish in the short term we are of the view that the upside momentum of gold could be hard to maintain due to an expected interest rate rise in the US. A rate hike usually reduces the appeal of holding a non-interest bearing bullion.

Suki Cooper, an analyst from Standard Chartered Bank have forecasted yellow metal’s price to average around $1783 per ounce in 2022.

Oil prices climbed for a fifth week in a row on continued signs of robust demand and strained crude supplies.

On Wednesday, oil prices hit a new seven-year high before giving away some of the gains on Thursday and Friday. The two days of declines however were still not enough to stop oil from recording a gain of 1.6% for the week as geopolitical tensions threatened greater supply shortages.

With oil prices continuing to rise most analysts are growing steadily more bullish. Morgan Stanley has now joined Goldman Sachs Group in forecasting oil to hit $100 per barrel later this year, whereas Bank of America has reiterated that it expects oil to hit $120 a barrel by American summer.

With many of man oil futures contracts now trading into an overbought category on a technical basis, however, Citigroup Inc. cautioned that sticking to a bullish view on the black gold could be dangerous after this quarter.

Oil’s rally has also caught the eye of the White House as it poses a political risk for US President Joe Biden. The US is considering accelerating the release of strategic reserves to control oil prices. With OPEC+ nations however refusing to increase oil output most of the options for President Biden to address the oil rally would be limited and most likely short-lived.

With the market becoming increasingly concerned about slowing economic progress in a rising inflation scenario, or stagflation the Australian Dollar had a roller-coaster of a week.

The local currency gained initially to peak at 0.7276 on Thursday encouraged by some positive Australian economic data.

However, with risk sentiment turning sour the Aussie turned around to close the week unchanged just below 0.7200. The Australian currency however gained against other major currencies such as the British Pound and Euro.

Market Mantra: Representative Picture; ; Image Source: @CANVA
Market Mantra: Representative Picture; ; Image Source: @CANVA

While Australian data did help Australia record a positive week against most major currencies we strongly believe that Australian data released these days hides the fact that the country is going towards stagflation as well.

Australia has only just started reopening after spending most of 2021 in lockdowns. As such that is why the numbers show a boom with record jobs created in November and the unemployment rate contracting to 4.2% from 4.5%. 

The numbers however miss the fact that Australia took longer than most other nations to put the machine back in motion and as such, it is yet to be seen if the country will be able to sustain decent job creation and inflation within decent levels.

The Indian Rupee, on the other hand, had another week of decline as rising oil prices along with FIIs fund outflows from the equity markets further weigh down the Indian currency.

While rising crude and trade deficit has been keeping the Rupee under pressure, it is expected that an interest rate hike in the US can potentially drive away more FII money from India thus making Indian currency lose further ground in the near future.

2022 has gotten off to a rotten start for a lot of investors, especially crypto traders and even a short trading week in the US, with markets closed on Monday in observance of Martin Luther King Jr. day could save both stocks and crypto from falling.

Bitcoin plummeted by more than 11% last week while Ethereum dropped 17% for the week. Soaring coronavirus cases across the globe, disappointing economic data and Fed taper fears all can be blamed for the recent bearish turn.

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

Regulators in the UK, Spain and Singapore also suggested toughening the rules on crypto-asset promotion to inexperienced investors while the Russian Central Bank proposed a complete ban on cryptocurrencies as Bitcoin fell below $38,000 for the first time in six months.

Other coins were also in red with Ether falling below $3000 and Solana, Binance Coin and Cardano also slumping as investors offloaded risky bets in a volatile week.

Bitcoin prices are now down more than 40% from their peak in November 2021, with rumours of a crypto mining ban in Russia, the effects of the tapering program and ongoing regulatory concerns in certain nations adding further pressure.

Having said that, increased use of Bitcoin and adoption in emerging and high inflation economies provide support to digital currencies and create a confusing market picture with no direction or strong momentum in either direction.

In Agricultural products, soybean gained 3% for the week, corn rallied by 2% whereas wheat was up by more than 5% on hopes of strong demand.

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 their trading journey how to trade. He can be contacted at adang@glowtrades.com.au.


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.

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