Market Mantra: Will US inflation worries kill the positive Australian market momentum?

Job ads in Australia have now reached levels not seen in 12 years, thus sparking fears among some businesses and recruitment firms of a workplace shortage.

Australian shares rose for the fifth week in succession as technology shares continued their upbeat performance and offset losses in mining stocks.

Investors pumped money into tech stocks taking the technology index to a 6.8% weekly gain as sentiment was boosted by hopes of a strong economic recovery. Afterpay, as we mentioned before, provided the major boost and reached its highest levels in nearly seven weeks.

However, the gains were dented by gold stocks that lost 10.5% for the week, their biggest weekly loss since March 2020. Mining stocks also suffered as copper prices continued to decline by 5.9%, its biggest fall since Jan 2020.

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Last week also brought some good news for the Australian market as 110,000 plus people found work between April and May, recording a fall in jobless numbers for the seventh month in a row, as the unemployment rate dropped to 5.1%. The unemployment rate in Australia is now lower than when CoVid19 hit the nation in March 2020 during which period Australia had a jobless rate of 5.3%.

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

Job ads in Australia have now reached levels not seen in 12 years, thus sparking fears among some businesses and recruitment firms of a workplace shortage.

The underemployment rate also fell to 7.4%, the lowest since its been since January 2014. Youth unemployment in May 2021 also reached its lowest point since January 2009.

All the positive momentum in the markets however seems to be coming to an end as a hawkish shift by the US Federal Reserve spooked the world markets on Friday night. The US Stocks ended a three-week winning streak as almost every sector shuddered. While the Australian market escaped the decline in world markets following comments from Jim Bullard, a member of the US Federal reserve, that increasing inflation in the US could result in an interest rate increase in 2022, the Australian stock futures are trading 1.5% below Friday’s close.

Market Mantra Stocks 1
Market Mantra: Representative Picture; Image Source: @CANVA

The decline in Australian futures after the Friday close strongly suggests that the Australian investors are jittery due to Bullard’s comments, which could further result in investor confidence in their positions getting dinged. Inflation worries in the US have resulted in a sell-off early this year. We will not be surprised to see the markets sell off a little bit again, especially given the strong run the Australian market has had and we enter a period of profit-taking.

The Fed stance also provided fuel to the US dollar as it rose against all major currencies. The US dollar index which tracks the greenback against six other major currencies recorded its strongest gain in 14 months as investors moved from other currencies to the safety of the US dollar.

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The stronger dollar also meant gold was less attractive as an investment, resulting in gold prices having their worst week in almost a year. The weakness in gold is expected to continue in the near term and we see gold falling even below USD 1700 due to current short term selling pressure.

Market Mantra Gold 2
Market Mantra: Representative Picture; Image Source: @CANVA

While the export of Swiss gold to China, the largest gold market in the world, remained strong for the second month in a row, a plunging demand of Swiss gold from India, the world’s second-largest gold consumer, in May Coronavirus added further pressure to gold prices.

Switzerland is the world’s largest gold refining centre and transit hub and its export numbers provide an insight into global market trends. Demand for gold in India and China both plunged when the pandemic began last year as jewellers were closed and people’s income took a hit.
Initially, the Indian gold market started recovering faster; however, as the second wave hit India, it started losing its shine again. With China’s import of gold however rebounding in recent months, all world eyes are on India opening up for global gold prices to start rising again.

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

The Australian gold miners shall come under strong pressure this week with falling gold prices.

Oil which usually goes in the opposite direction of the US dollar though continued to rise recording a gain of 1.1% following reports from OPEN nations that they expected limited output growth for the US this year. Despite the US returning to pre-pandemic life completely after a strong vaccination rive, the OPEC nations are cautious over increasing output and making commitments towards more wells. As such even though all other commodities have had a sell-off last week oil prices being supported by a disciplined supply continue to rise.

Following Fed comments, the strong US dollar meant traders drove out in flocks from risk currencies such as the Australian dollar last week. The Australian dollar broke the key 0.75 cent mark against the greenback on Friday night in the process of reaching its lowest price against the US dollar since December and giving control to the bears. Strong eye-popping jobless numbers from Australia and growth numbers from New Zealand did little to stop the slide with traders becoming reluctant to buy the Aussie against US dollars.

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

With bears taking control over the Australian dollar we expect it to also go down against the Indian Rupee next week and go below the INR 55 mark. The Indian Rupee, however, dropped to 74.08 against the US dollar, its weakest level since early May. We expect the Rupee to continue showing weakness against the US dollar and strength against the Australian dollar over the next week.

In the world of Cryptocurrencies, Bitcoin once again failed to breach the resistance around USD 41,000 mark. News from Spanish Bank BBVA that it would open a bitcoin trading service to all private banking clients in Switzerland failed to provide the expected lift as prices fell back to $34,000 at the time of writing this report.

Market Mantra Bitcoin 3 3
Market Mantra: Representative Picture; Image Source: @CANVA

As we mentioned last week Bitcoin is currently firmly ranged between USD 30,066 and 41,000. It would need to quickly rise back to at least $42,812 for bulls to take back control and rally it back to previous highs.  Etherium showed positive results early in the week, however, Fed’s comments on Friday have resulted in a broad sell down across all Cryptocurrencies too during the week as more and more traders move towards the US dollar. Ether prices though in the near term seem to cap at USD 2487.

China’s crackdown of cryptocurrency mining in Sichuan and similar crackdowns in Inner Mongolia, Xingjiang and Yunnan to meet their pollution targets for the year may also add to price weakness in Bitcoin in coming weeks. Even though some of these regions use hydropower instead of coal power China seems to be in no mood to end the digital war against these currencies and taking measures like stopping immediate electricity supplies to crypto mines they have detected.

Market Mantra Bitcoin 2 4
Market Mantra: Representative Picture; ; Image Source: @CANVA

In agriculture products we talked about a shift from corn to soybean recently due to high corn prices. This reflected in May figures which showed an increase of 82% in China’s import of soybean from Brazil. Chinese state-owned importers also bought at least eight cargoes of US Soybean in past 4.5 month. The soybean prices as a result continued to rally on Friday after a tumble on Thursday. The soybean imports to China from all origins are expected to remain high in coming months.

Wheat prices took a tumble to last week, however recovered some of the losses as Iranian state agency purchased 195,000 tonnes of milling wheat from European traders. Philippines have also reported to have bought 150,000 tonnes of wheat as told by European traders on Friday.

The wheat market is keeping a close eye on Jordan this week which is expected to issue a tender to buy 120,000 tonnes of milling wheat through a tender with shipment sought in December.


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 on their trading journey on how to trade. He can be contacted at adang@glowtrades.com.au.


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