Trading week preview

The ASX200 suffered a horror week last week, shedding 2.76 per cent as fears pertaining to emerging markets crises and global trade wars finally gripped Australian equities.

Source: Bloomberg

The ASX200
It was a remarkable reversal of trend for the ASX200, which only a week earlier clocked-up fresh post-GFC highs. The reasoning behind the sell-off is somewhat obscure but follows the trepidation that began in emerging markets and has gradually infected indices throughout Asian and Europe. The best explanation can be boiled down to a matter of sentiment: it has gotten to the point where the belief amongst traders is that although no single cause of financial contagion can be pin-pointed, there is enough fodder for a crisis that it’s not worth the risk of holding equities in the short-term. As such, a spate of profit taking has emerged in riskier asset classes and riskier markets, with the dynamic showing signs of persisting into the new week, opening possible challenges of the next major levels of support for the ASX at 6140 and 6060.

The Winners and Losers

On such a dour week for the Australian share market, on a sector-by-sector basis, the winners were difficult to find. Some defensive trading coupled with the momentum of some recent good news supported the telecommunications sector, which added 2.63 per cent for the week, led by a 2.98 per cent rally in Telstra shares. Every other sector was otherwise down, with Real Estate stocks’ relatively modest 0.87 per cent loss for the week the next best performer.

Naturally, losers weren’t difficult to come across, as share traders rushed to liquidate their positions. The health care sector was the worst performing, down 5.50 per cent, largely owing to the fact those stocks have sustained the highest year-to-date gains on the ASX. The growth stock heavy I.T. sector was the next worst performer, stripping 4.54 per cent, while a general fall in commodities prices hit blue chip miners like BHP and Rio Tinto, leading the lynch-pin materials sector 3.09 per cent lower.

The Little Aussie Battler

After gradually selling-off throughout the week, of course due to the increased fears about global growth and emerging markets, the AUD/USD broke through support at 0.7160 late on Friday, as interest rate traders boosted their bets on further interest rate hikes from the US Federal Reserve after US Non-Farm Payrolls data showed a marked climb in US wage growth. The stronger greenback pushed the Aussie Dollar to 2-and-a-half year lows at 0.7099, opening-up a serious challenge of the 0.7000 mark.

The damage to the Australian Dollar from the combination of higher global growth and financial risks, coupled with the stronger US Dollar, has not just been contained to the AUD/USD. The perennial global growth vs. risk sentiment proxy, the AUD/JPY, dropped to an 18-month low below 79.00, demonstrating the major bearish sentiment in markets at present; while the AUD/EUR traded at 0.6140 – a level not traded-at since August 2015.

The data week ahead

Event risk remains relevant this week, even though Australian data is much sparser than the previous fortnight: local employment figures will be the biggest one to watch, while business confidence will be looked upon with a small amount of curiosity given Canberra’s political chaos.

International news will be far more significant for ASX 200 and the AUD this week, as global markets prepare for significant US inflation and consumption data, along with meetings of the ECB and BOE.

Although it’ll take something remarkable for the dominant narratives around emerging market risk and trade wars to be upended, the data this week will provide valuable insight into the structural factors driving markets in the medium term.

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