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Trading week preview

The Australian share market continues to trade sideways, while the Australian Dollar’s play as a trade war proxy is still intact.

Market data
Source: Bloomberg

ASX 200

The ASX 200 is failing to demonstrate much strength above the 6200-level. Volumes tangibly increase beyond that mark, as the bears wrestle control of the market and steer the overall index back towards the bottom of its sideways channel around 6160. Several daily EMAs are converging in the centre of this range, apparently solidifying a sticky support/resistance level at 6190. The Australian share market is missing notable drivers at present, stupefied by the risks associated with the US-China trade war, and held-down by the unfolding drama relating to the Financial Services Royal Commission. As investors eye the back end of the year, these variables are unlikely to disappear – in fact, they could easily worsen – meaning the outlook for the ASX 200 is progressively becoming more pessimistic, at least in the short term.

Winners and Losers

Investors need not look any further than the bank and insurance stocks to find the market’s major losers. Having experienced a small relief on Friday in the lead up into the Financial Services Royal Commission’s interim report, bank stocks were smashed on Monday, as investors confronted the reality that the Royal Commission may lead to meaningful and material changes to the banking sector. The possibility of crimped bank profits from higher regulatory burdens perpetuated the financial sector’s downward trend, almost precluding any sort of a run higher from the ASX 200.

The winners last week, regarding the major large caps, were found in the energy sector, and to a lesser extent the materials space. Oil prices continue to underpin strong activity in energy stocks, with Origin Energy and Oil Search up by over 2% on the week – a dynamic forecast to continue as the price of the black stuff ticks closer to $US85.00 per barrel. A bounce in commodity prices aided a small recovery in the major miners, following a slight cooling in the US-China trade war, aiding 2 and a half per cent gains in the share price of BHP Billiton.

The little Aussie battler

The AUD remains the trade-war proxy du jour; although, it must be said that the currency’s volatility has settled in recent days. After swinging from the very bottom to the very top of its downward trend channel in the space of a fortnight, just a week ago, the AUD/USD has settled calmly in a tight range between 0.7200 and 0.7250 over the last week. The fundamentals are still conducive to a weaker Australian Dollar in the medium-to-long term, but a curious point will be how multi-year highs in short positioning on the Aussie battler will play out: a period of consolidation - however unlikely that may seem – we may see short-sellers grow impatient and unwind their positions. A pop in the AUD/USD could come about on this basis in the short term, and perhaps shift the technicals ever so slightly.

The data week ahead

Traders will keep a keen focus on Tuesday’s RBA meeting, but little is expected to come from it. Interest rates will stay on hold, and recent history suggests that the RBA will keep to their line that growth should clock above 3% into the next year, unemployment should fall to around 5% in the medium-term, and inflation will remain under target, while wages growth stays sluggish. The point of primary concern will be the RBA’s assessment of Australian households, considering the prospect of higher interest rates, low wages growth, and falling property prices, particularly as it establishes a context to Thursday’s local retail sales data.

International news will be angled towards Friday night’s monthly release of US Non-Farm Payrolls data. With the US Fed last week effectively putting-forward its vision for interest rate hikes into the next 2-3 years, trader attention will be set to the wage growth figures for assurance that US workers’ pay will keep ahead of inflation. Manufacturing PMI data has also already taken on some level of interest and will continue into the week, with no conclusive signs yet that the US-China trade war is impacting this metric dramatically. All the above will unfold, it’s worth mentioning - alongside a Chinese public holiday - that will last the full extent of the week.

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