Trading week preview

The ASX 200 gained traction towards the end of last week, as positive sentiment gripped traders and propelled Australian shares higher. For a period, it looked like a run towards a new 10-year high was on the cards, with the struggling energy sector clocking gains on Friday.

Market data
Source: Bloomberg

However, such is our brave new world, markets were uppercut in the North American session following new hostile remarks by US President Donald Trump – first towards the policy position of the US Federal Reserve, then towards the Chinese. 

In what was quite remarkable price action throughout the week, the
ASX 200 managed to pull itself up off the canvas after some early blows on Monday, to knock-out several levels of moderate resistance and reclaim the 6300-handle on an intraday basis on Friday. The move appeared to be a confidence booster for investors, who seemed emboldened by the ASX’s resilience, to drive broad based gains in the index over the course of the week.

Earnings estimates on an aggregate basis haven’t shifted a great deal in several months, so the underlying strength in Australian equities has only been gradually internalised by investors, with some bears still questioning the market’s strength.

However, perhaps a compelling and reassuring argument for the ASX’s recent rise lies in generally improved valuations (courtesy of a fall in discount rates), along with the increased attractiveness of the local share-market in the face of a falling AUD

The winners and losers

On a sector-by-sector basis, healthcare stocks posted the best collective showing last week, climbing 1.5%, to take its YTD returns to a solid 17.9%. Ramsay Health Care was perhaps the shining light in that space, adding just over 3% for the week. In terms of an individual stock, it’s impossible to go past last week’s meteoric rise of Australia’s new tech darling, Afterpay, which rallied remarkably by almost 40%. The move came following an announcement by the company of improved profit forecasts, and subsequent price target upgrades from several brokers.

In terms of the losers for the week, the energy sector suffered considerably, owing to the global sell-off in oil prices. This also weighed on the materials space, which also suffered due to the fall in global commodity prices amidst growing trade war fears. CSR was perhaps the most disappointing individual stock, after Goldman Sachs released a report downgrading its price target, citing slower sales growth for the company beyond FY18 due to the expected property market slowdown in Australia.

The little Aussie battler

The AUD was looking under significant pressure throughout last week, even despite the release of some solid fundamental data, predominantly by virtue of burgeoning strength in USD. The local unit reached an intra-week high on Thursday, following the release of better than forecast employment figures, briefly touching 0.7441, only to find itself legged come the end of that day’s session, to close only a few PIPS shy of new twelve-month lows at 0.7314.

A test of new lows was averted however, following US President Trump’s highly publicized criticism of the US Federal Reserve’s current rate hike bias, which saw funds flow briskly out of the USD and other Dollar denominated assets. For the time being, President Trump’s jawboning looks to have stalled the greenback’s rise and protected the AUD/USD from immediately testing its lows. A period of tight range trading for the pair is possible, although as it currently stands, its downtrend remains intact. 

The data week ahead

For fundamental data watchers, and those interest in rates and currency markets, the week is a big one. Wednesday morning will see the quarterly release of Australian CPI data, which is currently forecast to print on a quarter-on-quarter basis at 0.5%, taking the annualized number to 1.8%. The result (if realized) will be notably below the RBA’s target band of 2-3%, and will amount to the fifth successive print in which that has occurred.

In terms of how to view this event from a trading perspective, the volatility will certainly be greatest in the event of an upside surprise. With the RBA adopting an increasingly neutral bias to their policy decisions, and interest rate markets effectively pricing out a rate hike until the start of 2020, a CPI print that takes inflation above 2% - however unlikely that seems - could generate a rally in the AUD/USD, perhaps towards the currencies long term pivot point around 0.7500.

If the converse outcome comes to fruition – and assuming the AUD/USD spot price remains above 0.7375 when the data is released – the pair will reopen downside around support at 0.7350. It’s unlikely that interest rate markets could discount a hike from the RBA any more than it has based on this data release alone, so a swift return to trading off the more dominant USD related themes is probable in the event of a downside surprise.

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