27 May 2022 17:11
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Market Mantra: Miners boost Australian equities to a nine-week high

Federal Budget: Due to the looming election this year we can expect some big spending and less scrimping and saving than we might usually see.

While investors eyeballed Western nations announcing new pro-Ukraine measures in a unified front against Russia, the Australian share market overcame concerns about the war to rally for a second straight week on strong mining shares.

Helped by gains in iron ore and gold miners on strong underlying commodity prices, ASX overcame losses in heavyweight tech and financial stocks to end the week at a nine-week high.

With no material progress in the Russia-Ukraine peace talks, gold stocks climbed more than 6% as the yellow metal recorded its third weekly gain in four. Newcrest Mining, Australia’s largest gold miner, benefitted the most from rising bullion prices, hitting its highest level in more than two weeks.

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Iron mining majors BHP, Rio and Fortescue also gained strongly on higher iron prices, with Fortescue hitting its highest levels since early March. 

BHP 1

Uncertainty around the war in Ukraine persisted as Moscow’s attack on its neighbour entered its second month with Western leaders reinforcing their forces in Eastern Europe, expanding military aid to Kyiv and tightening sanctions on Russia.

Many economists believe the commodity prices will rise further if the Ukraine crisis worsens further. If that is the case we may see iron and gold prices skyrocket like nickel prices recently. As such the iron and gold miners should be a very good place to put money in the current situation.

Other than miners the energy stocks also rose by 4% for the week. Though sliding crude prices dented the appetite for local energy shares on Friday.

Some of the market optimism is reflected in bumper dividend payouts about to be made in Australia. Premier Retail chief last week led the way by announcing a bumper interim dividend of 46c a share, up from 34c a year ago despite thousand of days of lost trade and decline in profits by 13% for the six months to December.

BHP will also credit its shareholder accounts with one of the world’s largest dividends this week. All in all, an estimated $36.3 billion of dividends are expected to be paid out in Australia in March and April, with many expecting most of this money to be ploughed back into the share market.

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One of the biggest events for the Australian market this week will be the arrival of the Federal Budget on Tuesday night. Due to the looming election this year we can expect some big spending and less scrimping and saving than we might usually see.

PM Scott Morrison and Josh Frydenberg, Treasurer; Picture Source: Twitter @JoshFrydenberg
PM Scott Morrison and Josh Frydenberg, Treasurer; Picture Source: Twitter @JoshFrydenberg

Some of the big-spending have already come into focus, such as the $5.4 billion promised Hell’s gate dam in Northern Queensland to bolster LNP’s chances in Queensland. Historically though such projects have had a history of cost blowouts. The best example is the current inland rail project which was announced by LNP back in 2017 for $8.4 billion.

The project was then subjected to a $5 billion extension to Gladstone port as part of a deal to get National Party support for the net-zero greenhouse gas emissions by 2050. As per the last update, while the construction has started on the 1700 km project, the latest cost has ballooned to $14.3 billion and is expected to rise further as the final route through Brisbane is completed.

However, it is the debt side of the budget that will be in big focus as it limits the flexibility of the government to react to any future crisis and act as an anchor on economic growth over time.

As the gross government debt powers towards a net figure of $1 trillion and debt repayments alone set to reach $30 billion a year, whoever wins the Federal election will have a serious task of reducing that debt load. As interest rates rise, the debt will increasingly hamstring the Federal Government.

Other than the budget, consumer confidence numbers, building approvals, construction figures, job vacancies, household wealth, home prices and manufacturing numbers will also be keenly watched by investors this week.

Gold 2
Gold Market surge; Image Source: @CANVA

Supported by risks around Russia and Ukraine and talks about inflationary pressure gold recorded its best week in three.

Bullion is seen by many investors as a haven during times of political crisis and uncertainty. Some investors also perceive it as a hedge against high inflation.

The overall tone of the market continues to be supportive of the yellow metal as investors continue to add to the diversification of gold to their portfolios to shield against the war in Ukraine and higher oil prices that threaten global growth.

Having said that the expectations of monetary tightening by the US Federal Reserve may limit the upside in gold. Gold is highly sensitive to interest rate rises as it increases the opportunity cost of holding zero-yield bullion.

Traders looking to trade gold but wanting to play safe are advised to wait for the breakout of spot gold at $2000 on a weekly chart. A weekly close above those levels signals an opportunity to buy and hold for long.

The high-risk traders on the other hand can continue to maintain the buy on dips strategy with very tight stop losses as gold prices are expected to remain highly volatile and single Russia-Ukraine news could result in a big change in the yellow metal price in the short-term.

Oil recorded its first weekly increase in three weeks with Brent crude rising 11.5% for the week after traders began buying oil after a missile attack on an oil distribution facility in Saudi Arabia.

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

Brent crude rose sharply at the end of trading on Friday to close at $120.65 a barrel. West Texas Intermediate also recorded an 8.8% rise for the week.

An official from the Saudi Ministry of Energy said that the oil distribution station in Jeddah was attacked on Friday evening with a missile shell and the “Al-Mukhtara” station was also attacked with a bullet. Both attacks resulted in no injuries or deaths.

Saudi Arabia also warned that it would not be held responsible for any disruption in oil supplies to global markets following the Houthi attacks. 

As such we expect oil prices to continue to move higher in the short-term as the market which is already facing a supply crunch after shunning Russian oil now faces something else to worry about because of the Houthi attacks that could affect Saudi production.

With global stockpiles at their lowest since 2014, many analysts believe that the oil market remains highly vulnerable to any supply shock.

Boosted by rising commodity prices and a rebound in market sentiment the Australian Dollar has been on a tear against most of its major peers in recent weeks. Upbeat domestic economic data has also helped lift the Australian currency.

Last week, Australia’s PMI for manufacturing and services showed that the economy continues to improve strongly post Covid lockdowns.

Image source: Big Four OZ banks - Wikipedia.
Image source: Big Four OZ banks – Wikipedia.

This week will see February’s preliminary retail figures, building permits for February, job ad numbers and manufacturing PMI numbers. Most economists believe that the positive momentum will continue to advance after Australia removed the brunt of Covid restrictions over the last few months. The job ads numbers are likely to show acute labour market growth.

A better than expected set of data this week would likely fuel already rising rate hike bets for the Reserve Bank of Australia, benefitting the Aussie further. The 2022-23 Federal Budget is also set to be presented on March 29 and could have an impact on the RBA’s outlook. Alternatively, disappointing data could halt AUD’s recent rally.

From a technical point of view, AUD/USD is poised to extend its gains. The weekly chart shows that it continued to advance beyond its moving averages, while technical indicators offer a strong upward momentum within positive levels.

The daily chart offers a similar picture with the Momentum indicator heading firmly higher. The immediate resistance level is the October 2021 monthly high at 0.7554, followed by the 0.7600 level. A break of the latter could extend its rally towards the 0.7670 price zone. On the other hand, a corrective decline could kick in if the pair slides below 0.7490, a break of which could see the price approach 0.7400 levels, where we expect buyers to come back to maintain the bullish trend alive.

Unlike its Australian counterpart which has been benefitting from rising commodity prices, Indian Rupee continues to be pressured by inflationary concerns over elevated commodity prices.

Unlike the Aussie which has continued to show tremendous growth in recent weeks, the Indian rupee has continued to depreciate against most major currencies, closing the week close to 76.50 against the greenback.

Last week the Indian rupee went down by half a per cent against the US Dollar due to higher crude oil and weaker risk sentiments. While the RBI has been using its large foreign reserves, selling another $2.5 billion last week to prevent further slide of Indian currency, the risk sentiment and higher crude prices continue to skew the bias for Indian currency downwards.

 Moving on to digital currencies, the crypto assets had another strong week with Bitcoin seeing its highest weekly close of 2022. The cryptocurrency market cap was up by more than $200 billion in the past seven days as the majority of cryptocurrencies charted considerable gains.

Bitcoin surged by 8.4% and is testing important technical resistance at $45,000. This is the third time the currency is testing the resistance and it will be extremely important to see how it performs this time.

The altcoins in general followed BTC’s path up. Ethereum has rallied 11% for the week, BNB is up 5.6%, Solana increased by 14% – same as Dogecoin. However, t was Cardano that exploded by a whopping 32% for the week. ADA reclaimed the $1 level and then tested resistance at $1.20. At the time of writing the report though, it failed to overcome it.

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

All in all, it was a fruitful week for the digital coins with meaningful advances. That being said with most digital currencies now at key technical resistance it would be interesting to see if the momentum can transition to this week.

In agricultural products, the grain prices resumed their move upwards amidst supply chain concerns. Wheat futures added 2% for the week as traders watched for direction amid the Ukraine war. Soybeans prices were supported by lower production in South America because of drought, while corn gained on slow sowing conditions in the US.

Grain prices have continued to rise as some of the world’s biggest importers seek supplies from alternative shippers after Russia’s attack on Ukraine choked exports from the Black Sea.

With far fewer Ukrainian and Russian grain and fertilizers entering global markets, most experts fear that a bleak period of scarcer, pricier foods will arrive this year.

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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