27 May 2022 15:20
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Market Mantra: Australian shares rise amid commodities surge as investors see opportunities in Ukraine crisis

Australia will also keep a lookout on February’s job advertisement data, consumer sentiment, household spending intentions.

Bolstered by mining and energy stocks as commodity prices rallied sharply higher on supply disruption fears due to the Ukraine-Russia crisis, the Australian shares closed the week strongly higher.

The ASX 200 index advanced 1.6% after losing 3.1% the week before as Russian forces continued to roll through Ukraine. Even though uncertainty spooked the Australian market on Friday after an attack by Russian forces on a Ukrainian power plant, making the bourse drop 1.8%, it was a solid week of recovery for Australian shares compared to other Asian markets which tumbled to 16-month lows on the Ukraine crisis.

The reason why the Australian market performed so well was mainly due to energy stocks which posted their best week since the end of 2020. Galloping the price of oil and all energy sources amid fears of disruptions to Russia’s oil and gas exports helped the energy sector climb an impressive 8.9%.

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Miners also had an impressive week boosted by iron ore futures which clocked their biggest weekly gain in more than two years. BHP and Rio Tinto gained 11.7% and 10.5% for the week, pushing the materials sector up by 8.1%, thus recording their best week since April 2016.

Share Market 1 1
Share Market surge; Image Source: @CANVA

Gold stocks also advanced during the week with Newcrest Mining gaining 2.8% and Evolution Mining advancing 1.2% as investors scrambled to buy safe-haven assets.

Fears of Nuclear accident after an attack on a nuclear power plant on Friday however crunched Uranium stocks. At one time Paladin stocks plunged as much as 26% amid serious concerns of a nuclear disaster. Shares in Paladin however recovered some of the losses to close 14.8% lower as fears of a nuclear accident receded.

Looking ahead at this week, once again the events in Russia and Ukraine will continue to have a major impact on share markets. Apart from that traders in Australia will also keep a lookout on February’s job advertisement data, consumer sentiment, household spending intentions and the NAB business survey, all due this week.

With the Russia-Ukraine war fuelling global inflation fears to an alarming level and investors scurrying for safe-haven assets, gold logged its best weekly gain since May 2021. According to many commodity experts soaring oil, iron and wheat prices may further stoke inflation fears, which may continue to support gold prices in the nearer term. Gold is often seen as an inflation hedge by investors.

Gold 2
Gold Market surge; Image Source: @CANVA

With Russia not intending to de-escalate the conflict with Ukraine and risk sentiment continuing to deteriorate, we continue to remain bullish on the yellow metal in the short term. Gold also has a strong momentum on its side with investors scurrying towards the safety of bullion on the last trading of the week after a Russian attack on the Zaporizhzhia nuclear power plant prompted investors to rush for safety.

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Having said that gains in gold may be capped if the US releases stronger than expected CPI data on Wednesday. In January the CPI rose to 6%. A strong rise in CPI will result in a rise in US Treasury yields, which makes non-yielding bullion unattractive for holders.

In short, while the yellow metal should continue to move higher if investors don’t see signs of de-escalation in the Russia-Ukraine conflict, the upside conflict may be limited due to its inverse correlation with the US Treasury yields.

Oil prices ended the week at their highest price since 2008 and posted their biggest weekly dollar gain on record, with prices elevating as Russia’s war on Ukraine intensified and lead to a now-extinguished fire at a nuclear power plant.

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

All in all the oil prices rallied 25.5% for the week to register their strongest weekly advance based on records going back to 1991. Prices of oil, natural gas, heating oil and other energy sources have surged since Russia invaded Ukraine 10 days ago.

With Kremlin threatening to crumble supplies from Ukraine we believe that moving forward any events which reduce supply such as stricter restrictions on Russia or damage to pipelines will spark another rally for oil prices.

On the other hand, any other event such which may increase oil supply such as a new deal between US and Iran that allows Iran to resume reporting will cause oil prices to cool down.

Supply from Russia is already constrained even though currently there are no sanctions on Russian oil. However, with many Western allies kicking several Russian banks out of the SWIFT system trading in Russian commodities has become toxic for most global players.

As such we believe that while Russia is struggling to sell oil amid continued sanctions from the West allies if the US-Iranian deal gets delayed we could see Brent prices rising to $125 per barrel on Monday itself and quickly approaching an all-time high of $147 per barrel, a price last seen in 2008.

In our previous reports, we discussed how the Russia-Ukraine war could be good for Australia as strong sanctions on Russia would push up prices of goods exported by Australia thus benefitting the local currency.

As such even though world equity markets continue to get hammered on geopolitical tensions in Ukraine, the Australian Dollar has continued to remain the best performing G-10 currency against the US Dollar for the third week in a row.

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

The commodity-based currency closed the week on a fresh 2022 high against the greenback as aluminium hit record highs and gold, iron ore and copper prices registered strong buying. Euro was particularly hard hit against the Aussie Dollar with EUR/AUD pair sinking to levels not seen since 2017.

The sanctions levied on Russia have led to broad gains in commodities from metals to grains to energy products which has strongly helped the Australian currency.

Technically speaking the AUD/USD pair moved above 200-day Simple Moving Average (SMA). The traders can look to target the October 2021 highs if prices continue to move higher.

Looking at the charts, the price of local currency is pointing strongly North, with a large accumulation of possible targets around 0.7400 levels. The longer-term moving averages continue to head North and it seems that the AUDUSD pair is all set to test the November monthly high of 0.7555.

On the other hand, 0.7260 is the key support level sitting at 38.2% Fibonacci levels and a break below it could spur the prices to move all the way down to 7200 or even below 0.7000.

While the Australian Dollar continues to benefit from the Russia-Ukraine war, the Indian currency, unfortunately, sank below the 76 per US dollar mark last week. The ongoing geopolitical risks and a sharp decline in Asian stock markets have forced the traders to purchase safe American currency.

Indian Rupee; Image Source: @CANVA
Indian Rupee; Image Source: @CANVA

With oil also climbing up, INR has specifically been hammered. India imports more than two-thirds of its oil needs and a surge in oil prices threatens to widen the trade deficit for the Asian nation. As such traders will be turning their eyes towards the Reserve Bank of India to intervene and prevent the Indian currency from any further decline.

Moving on to digital currencies, it would be safe to say that the past seven days did not go too well for cryptocurrencies despite it finishing in black for the week. The Bitcoin rallied during the start of the week and at one time recovered all losses that came after Russia invaded Ukraine and even touched the $45,000 mark to record new monthly highs.

The bears, however, since stepped in and pushed the largest digital currency below $39,000 for the first time in five days.

The roller coaster ride was also visible in Ethereum. The second-largest currency rose from $2200 to above $3,000 and then retraced back to around $2,600.

Binance coin, Ripple, Polka Dot, Matic, Solana, Cardano, Dogecoin and Shibu all followed BTC’s wild ride and like Bitcoin ended the week slightly positive.

In agricultural products, most of the grains continued to rally as grain traders continued to digest the impacts of the Russian attack on Ukraine on global food supplies. Corn, in particular, was double-digits higher as China placed large orders of US Corn and soybean in efforts to mitigate risks of diminishing food supplies due to Russia’s invasion of Ukraine and slower harvests in South America.

Bitcoin 3

Chinese buyers last week booked 20 cargos of Soybean and 10 shipments of corn from the USA alone. There is also news of Chinese ships lined up outside Brazil’s ports and ready to buy corn and soybean at premium levels to replace food grains supply from Ukraine and also as a buffer for future supply losses.

The buying spree reflects robust worries of diminishing food supplies among the top importer.

Russia and Ukraine are among the world’s largest producers and exporters of major grains such as wheat and corn, and also vegetable oil. China on the other hand is a major buyer of corn and barley from Ukraine.

With supplies being disrupted in Ukraine due to continuing war, a shortage of farmworkers, and chaos around transport and logistics these crops are at major risk. Food security is a critical priority for Beijing and with vulnerability surrounding imports of major food grains, it seems China has gone for a major shopping spree to reduce its vulnerability to supply shocks.

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 on 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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