27 May 2022 15:10
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Market Mantra: On a decline amid inflationary risks

Reserve Bank Governor Dr Phillip Lowe warned investors to prepare for rate hikes in response to inflationary risks. 

Australian shares closed the week lower as investors remained on edge all week in the face of potential stagflation as price growth in the United States hit a 40 year high.

Inflation in the US hit a 40-year high with many analysts expecting worse to come as the spike at commodity prices due to wide-ranging sanctions against Russia will reflect more strongly in the next figures.

With the inflation rate moving extremely quickly against stagnant economic growth it has now brought stagflation into the realm of possibility.

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Australian investors were also on the defensive after Reserve Bank Governor Dr Phillip Lowe warned investors to prepare for rate hikes in response to inflationary risks. 

According to Brad Smoling, Managing Director of Smoling Stockbroking, investors can now expect the interest rates in Australia to move mid-year rather than the end of the year at this stage.

Financial markets have already begun wagering heavily on a first interest rate rise by June, partly due to the US Federal Reserve expected to raise lift rates this week and several other major central banks have already tightened.

Reserve Bank Of Australia; Picture Source: @CANVA
Reserve Bank Of Australia; Picture Source: @CANVA

The expectations helped the financials in Australia to notch 2.2% for the week to notch their best week in a month.

Technology shares that rely on easy money and benefit from low-interest-rate environments were hit particularly hard with local stocks down more than 3% on Friday alone. Technology stocks in Australia have now shed more than 20% so far this year, with shares in Zip Co now falling below their Share Purchase Plan price.

ZIP had earlier announced an SPP for a $1.90 issue price, however, with the stock now trading below $1.58, shareholders will be better off buying on market than through the SPP.

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The telco sector also shed 1.6% for the week and has now been down for nine of the last ten weeks. 

Shares in utilities, materials and energy stocks continued to show resilience in the face of determined selling as they stand to benefit the most from rising prices.

Moving forward the Russian invasion of Ukraine and retaliatory sanctions on Russia will continue to boost share market volatility this week.

Add to that an interest rate announcement by US Federal Reserve on Wednesday on the back of flying inflation and you have a very topsy turvy week in prospect.

Job Vacancy
Job Vacancy; Representative Picture: @CANVA

Traders will also keep a lookout for Australian job figures data, due on Thursday. It is widely expected that around 40,000 jobs were added in February.

Gold prices recorded a second straight weekly gain as no breakthrough was made in the first high-level talks between foreign ministers from Russia and Ukraine.

Bullion gained 1.2% for the week, although the yellow metal saw a dip on Friday as elevated US Treasury yields on the back of strong inflation data mitigated its safe-haven appeal. Gold is highly sensitive to rising US interest rates, as it increases the holding cost of non-yielding bullion.

Looking ahead we think gold is now consolidating as the likelihood of interest rate rise by US Federal Reserve on 16 March adding some pressures and Ukraine worries lending support.

Oil had an extremely volatile week, as Russia’s war in Ukraine continued and talks on an Iranian Nuclear deal stalled.

Oil moved lower initially as President Putin noted positive movement in talks with Ukraine. The black gold however soon rallied and ended up higher after Iranian nuclear negotiations were halted in Vienna.

Petrol bowser filling car; Image Source: @CANVA
Petrol bowser filling car; Image Source: @CANVA

A ban on Russian crude imports by the US and what looked to be signs of disunity amongst OPEC+ nations saw further volatility in the price of black gold during the week.

There have been indications though that Russian oil is being shunned more broadly after no buyer appeared in a recent tender for crude from the country’s the Far East.

Increasing penalties on Kremlin have prompted fear that an already tight oil market may be stretched further. Rystad Energy AS has predicted that Brent could soar to an eye-watering $240 per barrel by this Australian winter if countries continue to sanction Russian oil imports.

Brent saw a high of $139 a barrel and a low of $105 last week making it the widest trading range for oil in a week since turning negative in 2020.

Just like oil the Australian Dollar too had a wild ride this week as the implications of the Russian invasion of Ukraine continued to cause confusion through commodity markets.

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

The AUD/USD pair bolted higher to a high of 0.7441 during the start of the week on the back of strong commodity prices. Energy, wheat, precious metals, industrial metals all recorded new peaks across the board last week.

The rest of the week saw an unwind of this move as Aussie got caught in a risk-off sentiment that it had been avoiding of late.

Until now booming commodity prices had sheltered the Aussie from the impacts of negative risk sentiment, making it the best performing currency since February. Many analysts, however, believe that the risk rotation seen during the second half of last week could be a rotation back to a scenario that sees the AUD vulnerable to market sentiment.

The uncertainty in local currency going forward will remain dependent on the key question of whether or not elevated commodity prices can overcome risk aversion.

Technically speaking as long as the price of AUD/USD sits above the key resistance of 0.7365 the AUD/USD bulls will be targeting a move towards 0.75 level. 

On the downside, a break below the lows of the previous week could see the Aussie move down to 0.70 levels.

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

Contrary to the Australian Dollar which has continued to move higher on rising commodity prices the Indian Rupee has continued to edge lower due to rising oil prices.

Many analysts believe that surging oil prices will push inflation higher in the coming months. Oil prices have jumped 12% in March alone and have doubled since December 2021. This in turn will push fuel prices higher and ripple out across the economy. Many analysts believe this will in particular impact the Indian currency harder as the Asian nation imports more than 75% of its oil needs.

So far the Reserve Bank of India has focused on growth over inflation/ However, with prices continuing to surge they may be forced to hike interest rates sooner.

With high commodity prices as well as the outflow of foreign funds from equity markets expected to subdue the Indian Rupee further this week, expats in Australia will keep a close eye to see if the local currency will go above 56.00 against the Indian currency in order to remit more money back home.

Moving on to digital currencies, last week was riddled with volatility for cryptocurrencies as Bitcoin’s price went on a wild ride.

Bitcoin’s price was trading around $39,000 on Sunday the week before and quickly headed south to $37,300 on Monday. 

On Wednesday, however, the BTC rallied to $42K after there was a leak of the Executive order that US President Joe Biden was to sign, and it was perceived very well by the market.

However, the next day Bitcoin crashed back to where it was after US CPI numbers came out at highest since 1982 and raised expectations of an interest rate hike by the US Federal Reserve this week. The price of Bitcoin was sitting near $38,300 at the time of writing the report.

Bitcoin 1

Altcoins tried to follow Bitcoin’s price value for the most part of the week, but ultimately most of them ended up losing value in the past seven days. Ethereum was down about 8% for the week, BNB gave up 7.5%, Solana 14.6% and so forth.

All in all, it was an extremely volatile week for digital currencies that saw many leveraged positions being liquidated.

In agricultural products, wheat prices which jumped more than 40% the week before, reached an all-time high of $13.64 a bushel on Tuesday. The wheat prices have continued to rally in recent weeks due to supply disruptions from the Black Sea region following Russia’s invasion of Ukraine.

The prices however then turned south quickly as a sharp increase in recent prices kept International buyers away, resulting in wheat markets recording their biggest weekly loss in eight years.

The US Department of Agriculture said on Thursday that weekly export sales of wheat totalled 370,200 tonnes. Analysts had previously forecasted for the weekly total to be up to 700,000 tonnes

Corn was little changed last week, while soybeans were up almost 2% for the week.

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 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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