Trading week preview

The ASX 200 finished the financial year on Friday brandishing a solid return, with the index up ~8% for the year. The index appears willing and able to track down its recent decade long highs, amidst a big week for local and international markets.

Source: Bloomberg

Australian financial markets are looking at a busy week to start the new financial year. The ASX 200 is trading at a relatively healthy level, as it continues to buck the bearish sentiment that has infected global markets over the last several weeks. The index currently sits around 40 points, shy of the 10-year highs it achieved a fortnight ago, with a challenge to this level remaining a reasonable possibility. The gains in local shares are still closely pinned to a general recovery in bank shares, along with an oil driven rally in energy and material stocks. As a dense week of data looms, which includes an RBA meeting, search for a play by the ASX towards 6260, before it eyes the significant psychological level of 6300. 

The winners and losers

Given we’ve come to the end of the 2017/18 Financial Year, it may be beneficial to quickly reflect on what drove the ASX in the year just gone. In what can be considered a solid year when it comes to the index’s returns, the ASX managed to fight through the turmoil that gripped global markets in the final weeks of June to deliver a respectable ~8% to investors.

It was the late-cycle sectors that carried the load last year, with energy stocks yielding 38% and materials yielding just below 30%. This contrasts with defensive utilities and telecommunications sector stocks (the latter of which was weighed by a tough year for Telstra), which contracted 5.5% and 35%, respectively. Finally, financials were kneecapped by a series of regulatory and PR disasters for the Big Banks, combined with rapidly climbing global interest rates. The situation resulted in a flat return from financials, although recent trading suggests this tide may turn in the new financial year. 

The little Aussie battler

The Australian Dollar on Friday night managed to recover some of the losses it sustained earlier in the week, to rally 0.7% against its US counterpart and push above 0.7400. The AUD/JPY also regained territory, with that pair finding a ceiling just shy of 82.00. As has been the case for the AUD of late, the move higher in the currency can be attributed to a sell-off in the USD over the weekend, as risk aversion eased and funds flowed into other major currencies such as the GBP and EUR. The dynamic pushed the AUD/EUR back down to resistance around 0.6330, and halted the AUD/GBP’s modest run above ~0.5600.

The data week ahead

The local economic data calendar is looking heavier this week, working in line with a big Tier 1 data week for global financial markets. The two local highlights will be tomorrow’s meeting of the RBA, before interest turns to Australian Retail Sales Wednesday.

The RBA will keep rates on hold at 1.50%, with attention to be fixed on the central bank’s accompanying statement. Interest markets have priced out a rate hike from the RBA until early 2020, with lagging wage growth expected to keep inflation (on balance) below the bank’s target range of 2-3%. This story will set the foundations for the day after’s Retail Sales figures, which have lagged recently, predominantly due to high household indebtedness and the weak wages growth.

Look for volatility in currency markets subsequent both releases, along with activity in consumer discretionary stocks after Wednesday’s consumption data.

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