Australia Today - Stocks and the Aussie dollar point higher

Market Analysis /
Greg McKenna / 28 Aug 2018

Welcome to my Australia Today column where I'll have a look at some economics, the Aussie dollar, and the outlook for the ASX200 and SPI. 

As every Feedback is welcome

THE AUSTRALIAN DOLLAR

On forex markets, the USD is under pressure still as traders continue to bet the message Jerome Powell was sending is a dovish one. That's helped the Aussie dollar lift off an overnight low around 0.7305/10 to sit up at 0.7348 for an overall gain of approximately 0.35% from this time yesterday. 

The Battler is stronger this morning after 24 hours trade which was almost an exact replica of the ebb and flow of the Euro and USD moves.

Click on me, I'll expand
Click on me, I'll expand

That tells us that foreign investors have already moved on from the political turmoil of last week. In no small part that is because new Prime Minister Scott Morrison is seen as a steady hand on the tiller. That leaves investors and traders free to buy and sell the Aussie dollar on its merits.

And those merits have improved with this little bout of USD weakness.

The AUDUSD’s merits have also improved as oil has rallied, as gold has rallied, as copper has lifted off the mat, as the CRB has lifted, and as Basic Materials was the best performing sector on the S&P 500 last night. It’s a positive feedback loop linked to and feed by the USD move. But it’s positive nonetheless.

Looking at the charts on the day though, last night’s high at 0.7356ish is the first hurdle and then there is a reasonably formidable one around 0.7380/90 as you can see in the chart below. I always respect such trendlines. But if the AUDUSD were to close a day above that line it could be in for a substantial rally towards 0.7550/60.

Click on me, I'll expand
Click on me, I'll expand

ASX INDEXES

The ASX underperformed the big surge in Chinese stocks yesterday with just a 22 point gain. So it's no surprise with the 0.77% gain in the S&P 500, lead by a 1.45% surge in the basic materials sector of that index that SPI traders found another 28 points overnight. 

Overall the ASX and SPI should follow the US higher and play a little catch up given the global backdrop and the return to strength of basic materials. Naturally, the Aussie rally will be a little handbrake, but support held again yesterday. That’s a good sign. Here’s the SPI chart.

 

A LITTLE ON THE ECONOMY

House prices are going to keep falling. That’s the view of UBS and Morgan Stanley as reported by Patrick Commins in the AFR yesterday. The article looks at how the fall in house prices – even if it is very mild – and lack of capital gain will kill negative gearing as a trade for Australians. It also says there’s likely to be three years of falling prices and no RBA rate cut to ride to the rescue.

I kind of agree on all counts. Negative gearing only works if you are in the Ponzi finance stage where the capital gain is doing all the work. Because the best you can do is get back 50 cents for every dollar you lose and can claim tax on. More importantly though if prices continue to fall, or even just stagnate then in a low wage growth high debt environment consumers and households are likely to retain a high level of caution. Watch this space.  

And if you want to know why I’ve been saying for a while now the high watermark in prices is in for a while, look no further than this borrowing calculator I picked up from @PhilipSoos Twitter feed which shows just how much borrowing capacity has fallen. Soos said in a comment its UBS data via the DFA blog. I can’t comment on the exact veracity of the numbers. But I do know that the proper calculation of expenses under APG223 does reduce the size of a loan a buyer can take and thus the price they can pay for any level of income.

Source: Twitter Screenshot
Source: Twitter Screenshot

DATA:

Data wise today, there is close to nothing of note. South Korean consumer confidence is out in our time zone then its Euro Area loan and M3 growth this afternoon before we get the goods trade balance for the US along with wholesale inventories, the Case Shiller house price data, Conference Board consumer confidence and the Richmond Fed manufacturing index.

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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