Market Mantra: Is possibility of tougher curbs on mortgage lending on cards?

Both APRA and the Reserve Bank of Australia will remain cautious before undertaking any measures that may tighten the condition of the economy any further.

The high US inflation numbers have been rattling world markets recently. Australia is no different. With all risks off the table, ASX started the week with four consecutive sessions of losses.

However, it seemed like signs of a rebound in iron ore prices were all the excuse the Australian shares needed to end their losing streak. With iron ore prices jumping more than 5% on Thursday night the big iron miners such as BHP (up 2.85%), FMG (rising by 1.9%) and RIO (jumping 3.5%) all rallied to push through for strong gains on Friday.

Despite the gains on Friday, the four days of losses meant that the ASX still shed 0.2% for the week. Although given the inflation worries that have kept bulls away that looks like a strong result for the Australian market. The news that Chinese property developer Evergrande had miraculously arranged for funds and made some required interest payments also boosted the sentiment in the Australian market.

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The big four banks also rose, thus overcoming concerns that tougher mortgage curbs are on their way. APRA released an information paper last week preparing the banks for the possibility of tougher curbs on mortgage lending. APRA’s paper stated that it could also impose limits on higher-risks loans if the raised risks for the financial system.

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

However, with Australian job numbers also coming out last week and Australia’s total employment still 1.2% below its pre-coronavirus peak in 2020 we believe both APRA and the Reserve Bank of Australia will remain cautious before undertaking any measures that may tighten the condition of the economy any further.

Looking forward to this week the Reserve Bank will be a big focus again with the minutes of the RBA board meeting released on Tuesday. Given these minutes will provide an explanation on why the RBA decided to scrap the three-year bond yield target, they will be of more importance than usual.

On Tuesday, the RBA governor Dr. Phillip Lowe is also delivering a paper on “Recent Trends in inflation.” Given inflation is the topic of discussion on everyone’s mind lately with prices rising inexorably, the traders will be keeping a keen eye on it. Two other senior RBA officials, Tony Richards, Head of Payments Policy and Luci Ellis, Assistant Governor (Economic) are also delivering speeches his week and will be worth monitoring.

Looking overseas the traders in Australia will keep a keen eye on Chinese data. China will be releasing its retail sales, production, investment, unemployment data, and house price index this week. China is Australia’s largest trade partner, the traders will look for the forest of data coming out this week to monitor the status of the economy. China has been hit hard recently by higher raw material prices, elevated freight costs, electricity shortages, and environmental curbs. The strong export numbers from China had been the only saving grace.

In regards to gold, bullion posted its best week in six months as inflation fears continue to grow. Gold is often seen as a strong hedge against inflation and with US consumer prices continuing to grow and the Central Banks around the world reluctant to increase interest rates, the gold prices have gained as much as the US $110 per ounce since 03 November. Even a strong US Dollar could not dampen the mood of gold traders as a big jump in US consumer prices took center stage.

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Usually, a strong US dollar dampens demand for the yellow metal amongst buyers of other currencies. With Central Banks reassuring that they are in no hurry to raise interest rates in the immediate future, Societe Generale analysts forecast gold prices to rise up to $1950 an ounce in the first quarter of 2022. Oil prices posted a third consecutive weekly drop last week after US drillers added oil and gas rigs for a third week in a row.

A strong US dollar amongst worries that the US Federal Reserve will accelerate plans to boost interest rates tame inflation and also speculation that President Biden’s administration may release from the US Strategic Petroleum Reserve to cool prices further aided the decline in oil prices.

According to Louise Dickson, senior oil markets analyst at Rystad Energy, “This week has been a good reminder for oil markets that prices are not only affected by the supply-demand trajectory but also from monetary policy forecasts and by forms of government interventions. Higher interest rates would provide even further support to the dollar and even more downward pressure on oil prices.”

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

The US Energy Secretary, Jennifer Granholm also said on Monday that Biden could act as soon as this week to address soaring fuel prices. With air travel, however picking up rapidly across the globe, Russia’s Rosneft, the world’s second-largest oil company by output after Saudi Aramco, on the other hand, warned of even higher prices as demand outstripped supply.

In regards to the local currency, the Australian Dollar declined for a second week in a row as employment data missed the target. Last week Australia reported that it had lost 46.3K job positions in October. While we at The Australia Today did mention in our report last week that we expect the unemployment to grow due to continued lockdowns in NSW and Victoria in the month of October, most analysts were expecting the market to add 50K jobs.

The data meant that Australia’s unemployment rate has now jumped to 5.25% as the participation rate increased to 64.7%. It was all downhill for the local currency from there as market sentiment took a turn for the worse.

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

The Australian Dollar has in the last ten days have shed all the gains it had made in a month. Technically speaking, the AUD/USD pair seems to have hit its interim top and is ready to resume its slide. It is now sitting below the 61.8% Fibonacci entrancement level of its 0.7169 to 0.7555 rally and looking to test the 100 and 200 SMA convergence at around 0.7200 level. With the RSI pointing lower and consolidating firmly around 37, the chances of Aussie resuming its decline are much stronger.

The Indian Rupee also fell against most currencies, weighed down by a muted trend in domestic equities and persistent foreign fund outflows. India had been having a strong IPO interest from foreign investors lately. In the last couple of weeks, however, the trend has reversed. The spot remained negative for the IPO-related inflows last week. With inflationary concerns affecting the risk mood, there is now concern that the IPO-related inflows may dry out sooner than expected thus putting further pressure on the Indian Rupee.

According to Sriram Iyer, Senior Research Analyst at Reliance Securities, “An interest rate hike in S could lead foreign outflows from India and increase volatility across asset classes including currencies. In the world of cryptocurrencies, Bitcoin went through a considerable roller-coaster all week, first reaching an all-time high at the US $69K and then retracing subsequently. The digital currency started the last week hovering around the $61K mark. It soon started to rally and on Wednesday reached a new all-time high of $69K.

Unfortunately, straight after that the largest cryptocurrency took a beating and turned south. The BTC fell by $6,000 in value which saw $700 million worth of leveraged positions liquidated. The price then consolidated right above $65K before decreasing again. It was sitting around US $64K at the time of writing the report.

It would be safe to say that most of the other cryptocurrencies followed Bitcoin south and dropped in value with it. Things, however, do not look too bad as given the price of cryptocurrencies at the start of last week most coins are still in profit despite the correction. Bitcoin is up 3% for the week, Etherium 1%, Binance coin about 9%, Shiba Inu roughly 8%, and Litecoin a staggering 26%.

One interesting development this week was the Ethereum Name Services (ENS) airdrop. The platform released the governance token and airdropped it to anyone who had used the service at least once before. The average amount received was roughly 190 ENS tokens which is currently worth a little over the US $10K.

In agricultural products, wheat prices continue to rally to reach a nine-year high on concerns about tight exportable global supply. Soybean and corn also gain strength for the week. Wheat rose by more than 7% to record its best week in four months from the prospect that Russia, the world’s top supplier could curb exports. Russia also plans to set export quotas for the first half of 2022 according to Russian Agriculture Minister, Dmitry Patrushev.

Although Brazil cleared the import of genetically modified wheat from Argentina, the shipments of the new variety are unlikely to resume anytime soon given opposition from the strong wheat millers lobby and uncertainty surrounding broader global acceptance. The soybean and corn also added to their prices last week as the market digested news of a cut in US soybean yield by the US Department of Agriculture.

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.

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.