Trading week preview

The ASX 200 managed to end last week with an impressive rally, closing Friday’s trade up 0.89% at 6300. It was a psychologically significant achievement for Australian shares, which spent the week otherwise trading sideways amid various risk-off drivers. 

Market data
Source: Bloomberg

The week ahead will begin on a typically softer footing, but the litmus test for the ASX now will be what levels it can hold onto on thinner volumes, to assess the credibility of the index’s continued trend higher.

The Australian share-market is still trading higher, pushed-up by generally solid domestic investment conditions, and dragged along with the global equity market bull run. The ASX 200's upward trend appeared under threat as last week unfolded, failing for several days to shake a stubborn sideways trading pattern that had some calling an imminent consolidation for the index.

This risk remains, but a last ditch run by the banks, courtesy of an overdue response to a lift in global bond yields, added to the week’s success in the materials and energy sectors, to keep the market in with a chance to keep charging higher. The key this week will lie in how a spate of company reports reflect the overall corporate health of the Australian economy, and how fundamental data (particularly out of China) supports or undermines the global growth story.

The winners and losers

When it comes to sector-success, the materials and energy sector were at the core of the ASX 200’s 0.23% gain for the week. The creep higher in oil prices was behind the rally in energy stocks, while the announcement of a stimulus package by the PBOC supported commodity markets and the materials stocks.

In terms of individual shares, BHP shareholders benefited from news that company sold-off its ailing US shale assets for a better than forecast figure. The news forced the stock price out and above a sideways trading range, indicating that despite a drop off in iron ore prices, the company may be well positioned to consolidate in the short term, and boost profitability through cost cutting.

Another big gainer last week was Domain Holdings Australia, which managed to rally in excess of 8% courtesy of the announcement of the proposed merger between Fairfax Media and Nine. While investors have reacted sceptically towards the merger’s benefits for Fairfax and Nine, the increased scale for, and broader exposure of Domain’s already strong brand assets has galvanised trade in that company, with further positive news likely to support its trade.

The biggest losers last week were Nufarm Ltd, and Nine Entertainment Co Holdings, which both shed over 13%. The latter was caught up in the aforementioned news of a merge between Nine and Fairfax, while Nufarm suffered its losses following a drought-related profit downgrade. On a sector-by-sector basis, Healthcare dipped, eroding some of its remarkable year-to-date gains, and consumer staples fell as concerns about domestic consumption continued to weigh on investor’s minds.

The little Aussie battler

The AUD still appears reasonably well bound within a tight range, in what is otherwise a sustained downward trend. Local data isn’t changing the circumstances much, with the highly charged CPI figure last week unable to really move the dial, particularly as it relates to interest rate expectations. It just further proves that the AUD story at present – like much of the broader currency market – is really a USD story. As ever, the greenback’s strength is underpinned by the Fed’s rate hiking plans – a pursuit fortified by the remarkably strong (albeit below forecast) print of US GDP data on Friday evening.

The data week ahead

Global markets are looking ahead to a Tier-1 data week this week. Several of the calendar’s big events will transpire in the week ahead, which when combined with an ongoing reporting season and the uncertain geopolitical environment in the face of trade-wars, is sure to introduce an added level of volatility into financial markets.

On the local front, the ABS will release Trade Balance figures on Thursday, and Retail Sales data on Friday. While currency traders will have an interest in the state of country’s terms of trade, the larger of the two events is certainly Retail Sales figures. Consumption within the Australian economy has proven weak recently, owing to soft wage growth and mounting levels private debt – something that will need to reverse according to the RBA, before it considers hiking interest rates.

In international data, a raft of PMI data is released across the globe, with none more important than the Chinese PMI figures to be released on Monday. PMI tends to be a terrific forward-looking indicator of an economy’s health, so watch for potential volatility in markets if that PMI data indicates a slow-down in the Chinese economy. The attention will then shift throughout the week to this month’s print of US Non-Farm Payrolls, which is expected to reveal lower jobs growth last month, but higher a lower unemployment and higher wage growth.

The week will also be significant for interest rate markets and central bank watchers: the BOJ, the BOE and the US Fed are all scheduled to meet, with forecasters predicting different policy outcomes from each. The BOJ are tipped to discuss modifying their bond buying program, the BOE looks poised to hike interest rates, while the Fed’s commentary regarding its planned two rate hikes before the end of the year will be heavily scrutinised by traders.

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