Market Mantra: Australian shares rise on easing Omicron woes despite Evergrande default

Looking ahead for the Australian dollar the unemployment data on Thursday and business and consumer confidence numbers early in the week will be setting the tone for rest of the week.

Australian shares managed to record its first weekly gain in five weeks despite a slump in technology and energy stocks as investors take solace in easing concerns over the economic impact of the Omicron coronavirus variant.

The weekly rise in equities however still points more towards markets taking a refreshing pause after the carnage caused by fear of the Omicron variant rather than turning towards a new bullish rally.

The rise in Australian shares was however more impressive compared to the rest of the World given news that Chinese property group Evergrande has finally defaulted on its debts. The news immediately refreshed fears about the economic environment in China, Australia’s largest trading partner.

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The fears on Chinese economy resulted in energy stocks going south on reduced expected demand. The export dependant healthcare also took a hit on China worries with CSL falling more than 2%.

Technology stocks were also down for the week taking cues from sell off in US markets with Buy Now Pay Later companies such as Afterpay and Zip leading the declines.

It was a fantastic week however for Gina Rinehart backed Vulcan Energy which rose close to 20% for the week on announcement of an off-take agreement of its zero-carbon lithium with auto giant Volkswagen.

Looking ahead this week the Mid-Year Economic and Fiscal Outlook due this week will show what kind of a debt all the Federal spending during the COVID-19 pandemic has added up to.

Most analysts currently are betting at a Budget deficit of $106 billion for the year 2021/22. We believe however that given Victoria, despite a healthy land tax and stamp duty revenue announced a deficit of $19.5billion dollars, this figure would be much higher.

At the very least, we’ll all be paying plenty of taxes for the years to come just to meet the interest on those Budget deficits.

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Other data that will keep investors interested will be the job vacancies numbers, consumer confidence, RBA board meeting minutes and jobs and wages numbers.

Internationally, Chinese retail, investment and production figures will keep traders on the tenterhooks. These numbers are expected to shed light on how much is China’s economy slowing in the wake of Evergrande’s solvency issues.

In regards to gold, the yellow metal recorded its fourth consecutive weekly decline as investors continue to exercise caution amid Omicron worries.

Gold continues to trade amid $1770-$1810 range with investors worried about a hawkish Fed pivot and at the same time still uncertain around the Omicron variant, which could delay the interest rate rise.

According to Wang Tao, Reuters technical analyst, after the inflation numbers in US calming the gold investors Spot Gold looks set to retest resistance at $1789, a break above which could lead to a gain in precious metal prices all the way to $1805.

Oil prices posted their biggest weekly gains since late August, after markets were buoyed by easing concerns of global economic impact of the Omicron variant and rising fuel demand.

The Brent and US Crude both recorded a gain of about 8% for the week, their first weekly gain in seven, even after a brief decline on Thursday amid concerns surrounding China’s economy following default by Evergrande.

The oil traders are feeling more bullish with the black gold recovering half of its losses suffered since the Omicron outbreak on November 25. 

Keeping a lid on oil gains was however news of faltering domestic air traffic in China, due to tighter travel restrictions and weaker consumer confidence due to repeated small outbreaks. Default by China’s troubled property groups Evergrande and Kaisa have also raised some concerns about future oil demand.

Looking ahead while we are bullish on oil and feel the worst may be over for oil prices we still feel there is some residual risk to oil demand in the very near future.

In regards to the currency markets, the Australian Dollar made a nice comeback last week recovering from a fresh 2021 low of 0.6992 to end at around 0.7170 against the US Dollar.

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

The local currency rallied against the greenback alongside Wall Street which posted substantial gains last week. The spread of Omicron variant of COVID-19 ha been weighing on markets due to the uncertainty of how transmissible it is and the impact on human health compared to other mutations.

The markets however got a boost last week on early indications pointing towards a highly transmissible strain that may not lead to as many hospitalisations as other strains. While this perspective is yet to be verified it did not stop the investors in going back into risk on sentiment, which favours the Australian currency.

The investors were so buoyed by easing Omicron concerns that they even looked past Evergrande’s default news and continued to boost the Aussie against other major currencies.

Looking ahead for the Australian dollar the unemployment data on Thursday and business and consumer confidence numbers early in the week will be setting the tone for rest of the week.

The week however was not so good for the Indian Rupee which continued to decline against major currencies. The Rupee reached a new 18-month low against the US Dollar on Central Bank divergence. The US Federal Reserve is keen to tighten monetary policy, whereas the RBI is showing no signs of raising interest rates any time soon.

Indian-Rupee; Picture Source: @CANVA
Indian-Rupee; Picture Source: @CANVA

In addition consistent foreign fund outflows from India and rising inflation have accelerated the decline in Indian currency.

Moving onto digital currency markets, the traders in crypto markets are currently not in a happy space with Bitcoin posting its fourth consecutive weekly loss with even positive equity markets failing to unwind the negative sentiment that has gripped the digital assets market recently.

Bitcoin, the largest digital currency continues to test US$50,000 mark since tumbling 21% on 04 December. This is an important level and failure to secure it will most likely continue to spook investors. On the downside $47,300 mark provides immediate support, a breach of which could boost selling pressures.

Bitcoin has lost almost 30% in value since reaching its peak of US $69,000 on 10 November.

With no signs of relief in sight for the digital assets the other coins too got sold during the week. Ethereum struggled to gain pace against the US Dollar $4250 zone and got pushed down to $4040 mark at the time of writing this report.

With risk-off mood in crypto market linked to selling bias surrounding Ethereum, as per some of the analysts, the downside correction in crypto assets may be extended if Ethereum does not start a new upward trend above $4250 soon.

In agricultural products, wheat posted second consecutive weekly decline on improved world supply outlook after US Department of Agriculture (USDA) forecasted larger than expected global production.

The USDA raised its global wheat ending stocks by a greater than anticipated 2.38 million tonnes on a stronger production outlook for Australia and Canada.

A high demand from importing countries for corn and soybeans however helped them rally with corn rising 1% for the week and soybean posting a weekly gain of 0.4%.

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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