The two macro themes driving markets

Two developing macro themes are set to dominate markets in the near-term: the continued gain in the US dollar and the pullback in the oil price.

Oil
Source: Bloomberg

Last night saw these trends continue to develop with the DXY Dollar Index gaining 0.3% and closing above its key resistance level of 94, while news that Canada’s wild fires were moving away from oil processing facilities saw WTI oil fall 2.8% to its lowest level in two weeks. Commodities are set for a tough time in a stronger US dollar environment, but news that China may be pulling back on its aggressive 1Q stimulus is also driving prices lower. The iron ore price collapsed 5.7% overnight, sending Rio Tinto’s London listing down 8% in the FTSE.

The ASX is set to open 0.1% lower, but energy stocks and the materials sectors are clearly going to weigh down the index so the banking and financial sectors are going to have to do some heavy lifting today to halt a major decline in the index. Although two other trends are increasingly evident in helping certain stocks in the ASX: a weaker Aussie dollar and fear about a market pullback.

The Aussie dollar dropped another 0.7% last night, cumulatively losing 4.7% over the past five sessions. On a technical basis, the Aussie looks like it has plenty of room to fall further, after breaking through a key support level at US$0.7350 overnight. On the Ichimoku Cloud chart, price has also broken through the cloud and the leading Senkou lines are now indicating that it is in a downtrend. The Aussie looks to be heading to the US$0.71-$0.72 level this week.

AUM-AUD-100516-SML
Click to enlarge

This has been very bullish for stocks that benefit from a weaker Aussie dollar, in particular tourism-related stocks, exporters and USD earners. Sydney Airports, which benefits from increased tourist visits from a weaker Aussie dollar, has been rallying sharply ever since the 1Q CPI miss and gained 5.7% over the past week, consistently closing above its upper Bollinger band for the past five sessions. Hotelier, Mantra Group, which has had a nasty selloff this year, has gained 6.7% over the past week as well.

AUM-SYD-100516-SML
Click to enlarge

But a lot of investors have also been growing increasingly concerned that the ASX may be primed for a reversal. 79% of IG’s clients are currently short on the ASX. And this growing sentiment appears to be being expressed in strong buying in the utilities space. Duet, AGL and utility-like Transurban have all been rallying strongly as investors seek out hedges against a possible market reversal. Duet has managed four closes above its upper Bollinger band and broken through its key resistance level of A$2.29.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.