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Trading week preview

The prospect of higher global bond yields and its impact on risk assets has the ASX 200 and the Australian Dollar looking primed for down side this week.

Market data
Source: Bloomberg

The ASX 200 managed to close around 6186, bang in the middle of a trading range, even despite a mid-week spill that saw the local market bounce off support around 6120. Perversely, it was the same catalyst that enabled a recovery in the ASX that sent other global indices reeling: the rout in global bond markets in response to increased bets on imminently higher global interest rates. The rally in yields at the back end of the curve eased fears relating to the bank’s funding costs, and the concomitant impact of tighter net interest margins, spurring a modest relief rally in the financial sector on Thursday and Friday. Notwithstanding this burst in bank-stocks, the positive news element of higher global yields appears to be diminishing at the commencement of this trading week, as broader risks to stock market strength from higher bond yields apparently takes hold.

The Winners and Losers

The most upside was once again witnessed in the energy and material sectors last week, courtesy of the sustained rally in oil prices, which ticked above $US85.00 in Brent Crude terms, coupled with a catch-up rally in materials stocks in line with the bounce commodity prices over the past month. The financials bounced – led by the big banks and insurers – toward the end of the week because of higher global rates, though it wasn’t enough to pull that sector out of the red.

The steepest losses were felt by the rate sensitive Real Estate and Consumer Discretionary sectors, led by falls in the realm of 4-5% by James Hardie Industries, Lendlease, and Unibail-Rodamco-Westfield. The information technology and industrials space also bore the brunt of weak activity on Wall Street, as investors abandoned high-growth tech stocks, and trade-war sensitive industrial stocks.

The little Aussie Battler

The AUD was one of the worst performers of the G10 currencies last week, fighting for that invidious title with the equally embattled Kiwi Dollar. The sell-off in US Treasuries and the subsequent play into the USD was the primary driver here, backing-on from a series of remarkably hawkish Fed-speakers, along with solid ISM-Non-Manufacturing Data on Wednesday evening. Of lesser import, but still worthy of note, was the unwinding of bets on an RBA rate hike last week following the RBA’s policy meeting: a greater than 50/50 chance of a rate hike, according to interest rate markets, isn’t being priced in until March 2020.

The data week ahead

Local data is all about sentiment this week. NAB Business Confidence will be released on Tuesday, while the arguably more impactful Westpac Consumer Sentiment reading comes on Wednesday. With concerns floating about regarding the health of the Australian consumer, the Consumer Sentiment release will be perused for signs that falling property prices and lower wage growth is starting to manifest in the behaviour of Aussie households.

The international calendar looks a little fuller, but the headline attraction will certainly be US CPI on Thursday night. Given the flat wages-growth number on Friday night’s Non-Farm Payrolls release, traders will be looking for inflation risk elsewhere – naturally in the CPI figures this time around. Consensus seems to be that inflation risk isn’t manifesting a great part yet in bond prices; if this view happens to shift, a further kick-up in rates expectations will add fire under the USD and place greater pressure on the AUD.

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