Market Mantra: Australian shares rise for a second straight week, as US inflation worries return

High inflation numbers on Friday will be a sign of worry for the bulls and may push the prices south again for the equities market.

Australian shares rose for a second week straight despite tumbling on Friday as inflation in the USA hit a 40-year high, leading markets to price in a more aggressive tightening cycle by the US Federal Reserve.

While the markets rallied for most of the week, a hot inflation number out of the United States was the only news Australian traders needed to sell down on Friday. The Australian shares fell by 1% on Friday thus trimming the weekly gains to 1.4%.

The hardest hit was the technology sector which dropped 2.8% on Friday as US consumer prices rose at an annual rate of 7.5%, the fastest since 1982. That backward step on Friday still left the technology index up 2%.

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The banks and travel sector were the stands out sectors for the Australian market. The finance sector rallied 4% for the week on the back of some really strong numbers out of CBA and NAB. The travel stocks with the re-opening of the international borders soared with Flight Centre up 18.6%, Webjet shares rising 17.5% and Corporate Travel Management advancing by 12.9%.

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

Also, notable performers for the week were the big iron ore miners with BHP, RIO and Fortescue all gaining due to the rise in iron ore prices.

There was some negative company news though for the week with Magellan continuing to lose funds under management. Shares in Baby Bunting also slipped despite posting a 10% increase in revenue, 11% increase in net profit and a 13.8% increase in interim dividend to 6.6c per share.

While the share markets have shown signs of improvement and recorded solid gains in the last two weeks, we believe the high inflation numbers on Friday will be a sign of worry for the bulls and may push the prices south again for the equities market.

This week the January labour force numbers will be the biggest thing for traders to keep a watch for. Many analysts expect the numbers to show employment increased by 45,000 jobs in January. The strong job market is coaxing a lot of Australians to dip a toe in the water and it is expected that the unemployment rate could drop towards 4%, hitting a new 14 year low.

Internationally though it will be minutes from the US Federal Reserve that will dictate the market movement this week as the minutes will confirm the chance of an interest rate rise in March.

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Chinese inflation numbers are also due this week, with the market expecting a bit off slow down a supply chain issues ease.

Gold prices too rallied last week, helped by a pullback in US Treasury bonds and growing inflation concerns. 

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

Spot Gold futures rallied past $1840 per ounce, their highest since late January as US 10-year Treasury yields backed off after hitting 2% for the first time in nearly three years.

Investors will now be looking out for minutes of the Federal Reserve meeting for the pace of policy tightening and signals for interest rate rises.

The overly hawkish message pushed gold prices below the $1800 mark, however, the bullion has since gradually recovered towards the levels seen at beginning of the year.

Data released by the US last week showed a spike in consumer prices and there is widespread consensus that it could increase pressure on the US Federal Reserve to take a stronger stand to fight inflation. Fed Fund Futures are currently pricing in a chance of a 50 basis points hike at next month’s policy meeting.

The gold market is currently been trading in a range between $1790 and $1860 and waiting for the lift-off from the Fed.

Oil extended its rally to the eighth consecutive week as escalating fears of an invasion of Ukraine by Russia, a top energy producer, added to concerns over tight global crude supplies.

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

Russia has amassed enough troops near Ukraine to launch a major invasion, Washington said, as it urged all US citizens o leave the country within 48 hours. Australia too closed their embassy in Ukraine while Britain also advised its citizens to leave Ukraine, thus escalating oil prices to a new seven-year high.

Trading volumes for both Brent and Crude oil spiked in the last one hour of the trading as it seemed oil traders did not want to go short on oil over the weekend.

The IEA in the meantime also warned that world oil demand may rise even more steeply this year on a strong post economic recovery.

The IEA also added however that Saudi Arabia and UAE could help to calm volatile oil markets if they pumped more crude oil. The two OPEC producers have the most production capacity. However, it seems at the moment OPEC+ nations are in no mood to increase oil production and with geopolitical concerns surrounding Russia and Ukraine oil prices are headed for US $100/barrel thus deepening inflation worldwide.

The Australian Dollar this week seems to have come under pressure from rate differentials again. The Reserve Bank of Australia continues to sit on its hand hoping that the inflation is temporary, whereas the Federal Reserve in the US is gearing up for an almighty battle to get runaway inflation under control.

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

Rate hikes look for the US with CPI hitting 7.5% this week, highest since 1982. At that time Paul Volker was the Chair of Fed Reserve and had the backing of White House administrations to rein in rising prices. Severe increases in borrowing costs at that time did eventually bring CPI under control but came at a cost of two recessions.

Ultra-loose monetary policy since 2008 has the US-facing same prospects as then. With inflation entrenched in the US and widely believed that the US has reached full employment, it seems a rate hike is coming in the US but not for a while in Australia.

This is supportive of US Dollar and the disparity in interest rates could see the Aussie go lower.

The Indian Rupee too suffered this week falling to a six week low as RBI announced a super dovish policy on Thursday and high oil prices continued to weigh in on the Indian currency.

High Crude oil prices worsen India’s external position as the Asian nation imports 80% of its crude oil requirement. With oil prices gearing towards $100/barrel the Rupee could come under more pressure in the coming days.

Moving on to digital currencies, Bitcoin has somewhat recovered coming into the month of February. The cryptocurrency dropped below $33,000 in the final week of January and started February trading around $38,500.

Last week the largest digital currency closed at around $41,000. From there it continued to rise to hit as high as $45,500 when inflation numbers in the US sent shivers in the crypto market making Bitcoin lose out on all weekly gains to trade around the $41,750 mark at the time of writing the report.

Bitcoin; Picture Source: @CANVA

The late drawdown last week was enough for crypto market sentiment to take a fresh hit with Ethereum also dropping below $3000. The performance of other coins was also poor with Binance Coin, Shiba Inu, Dogecoin, Stellar, Cardano, Avalanche, Polygon, Ripple, Solana, Terra, all trading lower compared to the same time last week.

In agricultural products, soybean futures rallied for the fourth consecutive week. Soybean futures have now rallied more than 15% in the past four weeks as severe drought in Brazil and Argentina have curbed production and underpinned suppliers.

Dry weather in recent weeks also boosted the price of wheat and corn with wheat gaining half a per cent for the week and corn rising by 3%.

Author: Ateev Dang is a trader and trading coach by profession. He runs 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.


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