Category: Australia & NZ

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ASX Weekly Market Snapshot

Bull-Bear Market Indicator
Stock Market Pricing Indicator

The dial on the left indicates bull or bear market status, while the one on the right reflects stock market drawdown risk.

Bull/Bear Market

The ASX Bull-Bear Market indicator remains at 64%, with two of five leading indicators signaling Risk-off, while the US leading index remains at 60%:

Bull-Bear Market Indicator

This was covered in more detail last week.

Stock Pricing

This is our first publication of the ASX stock pricing indicator, currently at the 88.31 percentile. The high reading warns that stocks are at risk of a significant drawdown.

Stock Market Value Indicator

The Stock Pricing indicator compares stock prices to long-term sales, earnings, and economic output to gauge market risk. We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for the five readings and convert that to a percentile. The higher that stock market pricing is relative to its historical mean, the greater the risk of a sharp drawdown.

Value Indicators

The Warren Buffett indicator compares stock market capitalization to GDP. By comparing market value to total output, it eliminates fluctuations due to profit margins, providing a more stable long-term ratio. The 86.13% percentile indicates the ratio is high compared to its long-term mean of 1.02.

ASX Market Capitalization/GDP

We only have limited data for the ASX 20 forward PE, but this still provides a useful measure of current value. We use a 20% trimmed mean to remove the most extreme readings in the index, which tend to distort the average.

ASX 20 Forward PE with 20% Trimmed Mean

A similar measure is used on the price-to-sales ratio for the ASX 20. The 20% trimmed mean of 4.49 is close to its 2021 high.

ASX 20 Price to Sales with 20% Trimmed Mean

The price-earnings ratio is based on the latest trailing earnings (blue below), which can generate extreme readings when earnings fall sharply, as in 2020. We use a second pe-ratio based on highest trailing earnings to eliminate the extremes. However, the large resources sector, with higher-than-normal earnings volatility, necessitates using both ratios to provide a more balanced view.

ASX Price Earnings Ratio of Highest Trailing Earnings

The current dividend yield of 3.77% is below the long-term mean of 4.11%. We use a reverse z-score for the ASX dividend yield, as lower yields indicate higher valuations (similar to high PE ratios).

ASX Dividend Yield

Conclusion

We are borderline in a bull market, with the bull-bear indicator at 64%.

Stock pricing remains high, increasing the risk of a significant drawdown.

Acknowledgments

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Strong uptrends in stocks and gold

A longer-term view, with weekly charts, shows stocks and gold in a healthy bull market. The energy sector is bearish, indicating low short- to medium-term inflation, as are industrial metals.

Stocks

The S&P 500 closed above 6100, signaling a fresh advance. Expect retracement to test the new support level, but respect will likely confirm a target of 6400.

S&P 500

Mega-cap technology stocks are the primary driver, with large caps lagging. Lower Trend Index peaks on the S&P 500 equal-weighted index ($IQX) warn of selling pressure, and another test of primary support at 7000 is likely.

S&P 500 Equal-Weighted Index

Financial Markets

Bitcoin consolidates above 90K, indicating stable liquidity in financial markets.

Bitcoin (BTC)

Treasury Markets

The 10-year Treasury yield signals another test of support at 4.4%. Respect is more likely, and another test of 4.8% would be bearish for stocks.

10-Year Treasury Yield

Dollar & Gold

The Dollar Index has weakened in the last two weeks as the Trump administration threatens to disrupt the global trading system with increased tariffs. Respect of support at 106 remains likely, but a breach would offer a target of 102.

Dollar Index

Gold is in a strong uptrend. The current retracement will likely respect support at $2,800 per ounce, confirming our target of $3,000.

Spot Gold

Energy

Crude is in a bear market, with Nymex WTI crude respecting resistance at $80 per barrel. We expect crude to remain range-bound for most of the year.

Nymex WTI Crude

We are long-term bulls on uranium, but there are no buy opportunities. The Sprott Physical Uranium Trust (SRUUF) confirmed the bear market, breaking support at 16 to signal another decline.

Sprott Physical Uranium Trust (SRUUF)

Copper

Copper rallied strongly over the last two weeks, testing resistance near 10K. However, the move is not driven by an increase in end-user demand. From Mining.com:

Worries that US President Donald Trump may impose tariffs on copper had spurred traders and investors to buy copper on the US COMEX exchange and sell on the LME.

Short or bearish positions on the LME are being cut or rolled over ahead of settlement on Wednesday, turning discounts for nearby copper contracts against those further along the maturity into premiums or backwardations.

Copper

Iron & Steel

Iron ore continues its gradual downtrend.

Iron Ore

Australia

The ASX 200 recovered above resistance at 8500, confirming a medium-term target of 8900.

ASX 200 Index

Conclusion

US and Australian stocks are in an uptrend, supported by strong liquidity in financial markets. However, the Trump administration’s trade policies have unsettled markets, making them susceptible to higher-than-normal volatility.

Bonds are in a bear market, and the 10-year Treasury yield is expected to resume its uptrend.

Gold continues in a strong uptrend, with demand driven by geopolitical changes. Respect of support at $2,800 per ounce would confirm our short-term target of $3,000.

Industrial metals remain in a bear market due to weak demand from China.

 

 

 

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Australian retail sales and building approvals

Seasonally adjusted retail sales grew by 0.5% in volume terms in the September quarter.

Australia: Retail Sales

The headline number, however, disguises the underlying stress consumers are experiencing. Per capita retail sales are falling steeply.

Australia: Retail Sales per Capita

The RBA is unlikely to act on this, however. Instead, it will focus on headline numbers like dwelling approvals, which have broken their recent downtrend.

Australia: Building Approvals

Conclusion

A November rate cut remains unlikely.

Acknowledgments

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ASX 200 jumps to new high

A strong September jobs report boosted the ASX 200 to a new high of 8355, confirming our target of 8500 for this year.

Labor Market

The Australian economy added a seasonally adjusted 64,100 jobs in September, according to the latest Labour Report, well above expectations of 25,000.

Australia: Employment

The unemployment rate remained steady at 4.1%.

Australia: Unemployment

The surge in jobs was absorbed by an increase in the participation rate to a robust 67.2%.

Australia: Participation Rate

Aggregate hours worked also improved to 1,968 million in September, a 0.3% increase compared to the 0.2% average over the past 12 months.

Australia: Aggregate Hours Worked

Business

Strong labor conditions failed to inspire business confidence, with NAB business confidence (black below) declining to -6 pts in the third quarter.

NAB Business Confidence

Wage costs were the number#1 issue affecting business confidence:

Issues Affecting Business Confidence

The Mining industry (red below) recorded a sharp drop in confidence.

NAB Business Confidence by Industry

Stocks

The ASX 200 rallied through resistance at 8300, confirming our year-end target of 8500.

ASX 200 Index

The ASX 200 rally was led by a strong surge in Financials, which is headed for a test of resistance at 8600.

ASX 200 Financials Index

The ASX 300 Metals & Mining Index remains tentative, weighed down by falling demand from China. Breach of support at 5600 would warn of another test of long-term support at 5000.

ASX 300 Metals & Mining Index

On the other hand, the All Ordinaries Gold Index is testing its July 2020 high at 9500. Breakout would offer a long-term target of 14500. The soaring gold price and falling energy costs have boosted margins, with diesel a substantial cost in extraction and transportation.

All Ordinaries Gold Index

Conclusion

A strong jobs report boosted the ASX 200, which recorded a new high of 8355, confirming our target of 8500 for the year.

Strong employment growth suggests that the RBA is unlikely to cut interest rates before next year. Instead, the hawks will be keeping a beady eye on inflation.

Business confidence remains low, with Mining especially hard hit by sluggish demand from China.

The Financials sub-index is headed for a test of resistance at 8600. Breakout would offer a medium-term target of 9200. The All Ords Gold Index is also bullish, testing its 2020 high of 9500. Breakout would offer a long-term target of 14500. Metals & Mining, however, remain bearish.

Acknowledgments

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Houthis and the blow-back

Stocks retraced to test support on concerns over an escalation of hostilities between Israel and Iran and its potential threat to the flow of crude oil from the Middle East.

Stocks

The S&P 500 retraced to test support at 5670/5700, but rising Trend Index troughs signal buying pressure. Respect of support will likely confirm another advance, with a target of 6000.

S&P 500

The equal-weighted index ($IQX) shows that large caps experienced a similar retracement.

S&P 500 Equal-Weighted Index

Financial Markets

Bitcoin is consolidating in a narrow “descending flag” channel. Marginally lower troughs are typically a bullish sign, reflecting support. Upward breakout from the channel would signal a fresh advance, confirming strong liquidity in financial markets.

Bitcoin (BTC)

Treasury Markets

Increased demand for safety drove 10-year Treasury yields lower, again testing support at 3.7%.

10-Year Treasury Yield

Dollar & Gold

The Dollar strengthened, benefiting from the same flight to safety.

Dollar Index

Gold retraced to test support, but the flight to safety will likely fuel another rally, breaking resistance at $2,700 per ounce.

Spot Gold

Silver found short-term support at $31 per ounce and will likely re-test long-term resistance at $32.

Spot Silver

ISM Manufacturing

The ISM Manufacturing PMI continues to signal contraction, holding steady at 47.2%.

ISM Manufacturing PMI

The New Orders sub-index at 46.1% warns of further slowing ahead.

ISM Manufacturing New Orders

So does the Employment sub-index at 43.9%.

ISM Manufacturing Employment

The Prices sub-index surprised, dropping below 50% for the first time since the beginning of the year, reflecting declining inflationary pressures.

ISM Manufacturing Prices

Labor Market

Job Openings also surprised, increasing to 8.04 million in August. The gap above unemployment indicates continued labor market tightness.

Job Openings

Crude Oil

Brent crude is rallying on fears of an interruption to oil supplies from the Middle East.

Brent Crude

Conclusion

Escalation of hostilities between Israel and Iran is likely to fuel a flight to safety, increasing demand for Treasuries, gold, and silver.

We expect the S&P 500 to retrace to test support at 5670. Crude oil is likely to rally but remain in a bear market unless Iran attempts to interdict shipping in the Straits of Hormuz and the Red Sea through its Houthi proxies in Yemen.

The ISM PMI warns of a slowing manufacturing sector, but there has been no significant decline in cyclical sector employment so far. Job openings also maintain a healthy gap above unemployment, indicating a still-tight labor market. The economy is expected to remain reasonably robust until the new year, when liquidity may tighten as the US Treasury likely reduces T-bill issuance, replacing them with longer-term coupons.

Acknowledgments

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ASX retraces

A tall shadow on the ASX 200 indicates short-term selling pressure and a likely retracement to test its new support level at 8100.

ASX 200 Index

Financials continue their advance, but gradually, with lower Trend Index peaks warning that buying pressure is fading.

ASX 200 Financials Index

The ASX 300 Metals & Mining Index hesitated after its recent rally and will likely re-test short-term support at 5200. Penetration of the descending trendline indicates that the downtrend has weakened, and a correction that respects support at 5000 would confirm that a bottom has formed.

ASX 300 Metals & Mining Index

Iron ore continues its downtrend as Chinese industrial demand weakens. A breach of support at $90 per tonne would confirm our target of $80.

Iron Ore

However, the All Ordinaries Gold Index broke resistance at 8500, signaling another advance with an expected target of 9000.

All Ordinaries Gold Index

Conclusion

The ASX 200 is retracing to test support at 8100. Respect will likely confirm another advance with a target of 8500. Financials and gold miners are strong, but iron ore remains in a downtrend with a long-term target of $80 per tonne.

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Australian job growth surprise

Australian jobs grew by a surprising 50.2K, compared to consensus estimates of 20K, with total employment reaching 14.4 million.

Australian Jobs

But employment per capita remains steady at 64% because of the huge swell in immigration.

Australian Jobs per capita

The unemployment rate ticked up to 4.1%, while trend remained steady at 4.0%, as the participation rate grew.

Unemployment Rate

Total hours worked increased to 1.97 billion, a 1.3% increase in the trend since June 2023.

Total Hours Worked

Average hours worked (trend) declined to 136.6 hours in June, from 138.6 hours 12 months ago, reflecting slowing demand growth.

Total Hours Worked

Conclusion

Westpac believe that the strong June labor report points to a soft landing ahead. We are more skeptical. Soft landings are often promised and seldom materialize.

China has reported deflation for the fifth quarter in a row. When your biggest trading partner suffers from deflation, it generally is bad news for you as well.

China Deflation

Acknowledgements

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Australian Outlook | Chris Joye

Central banks are too much under the sway of government and not doing enough to contain inflation. None worse than the RBA which is holding rates lower than they should be. The last time that we had inflation at 4.0% in 2008, the cash rate was 7.25%. Now the cash rate is only 4.35%.

RBNZ is far more independent and hiked their official cash rate to 5.5%. The NZ economy is in recession but they still face the threat of stagflation, with low growth and high inflation.

In Australia we have a negative output gap, where demand exceeds production capacity, far worse than in most other major economies. The only solution is to raise unemployment to lower demand. But RBA governor Michelle Bullock has publicly stated that the RBA is not looking to reduce employment.

The latest Australian government budget is highly stimulatory and likely to fuel further inflation.

The outcome is likely to be long-term inflation and higher long-term interest rates.

Conclusion

We expect strong inflationary pressures in the next decade as governments run large fiscal deficits. Additional government spending is needed to:

  1. Address the energy transition from fossil fuels to renewables and nuclear;
  2. On-shore critical supply chains; and
  3. Increase defense spending in response to geopolitical tensions.

Long-term interest rates are expected to rise over the next decade, fueled by higher inflation.

Central banks may attempt to suppress interest rates by further expanding their balance sheets to buy long-term fiscal debt but that is short-sighted. Inflation would accelerate even higher.

Apart from the hardship to wage-earners, and the subsequent political chaos, high inflation would threaten bond market stability. Bond market investors would be reluctant to fund deficits when interest earned is below the inflation rate. Unless there are no alternatives.

That is why the long-term outlook for gold and silver is so bullish.

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Australia: Resilience or recession, it depends where you look

The Judo Bank/S&P Global Composite PMI Index for May continues to signal expansion (above 50 on LHS), albeit at a slightly slower rate of 52.6 compared to 53.0 in April.

Judo Bank/S&P Global Composite PMI

The Manufacturing PMI continues to signal contraction (below 50) but the rate slowed to 49.6 in both April and May.

Judo Bank/S&P Global Manufacturing PMI

The Services PMI continues to flag expansion, however, but at a slower rate of 53.1 compared to 53.6 in April.

Judo Bank/S&P Global Services PMI

The May report was quite upbeat. Warren Hogan, Chief Economic Advisor at Judo Bank:

“The increase in the employment index to its highest level in more than six months suggests that private sector demand for labour remains strong, particularly in light of the weakness in consumer spending over the first three months of the year. The results are consistent with the official employment figures, which show an average monthly increase in total employment in Australia of around 40,000 in 2024, made up of both full-time and part-time jobs.

….The Flash PMI report points to resilience in Australia’s business sector despite ongoing cost pressures and skill shortages. Most impressive has been the ability for businesses to navigate this difficult operating environment as well as weak consumer spending. With the Government injecting more than $30bn into household finances in 2024/25 through cost-of-living relief and tax cuts, Australian businesses should be expecting to see some improvement in consumer spending.”

April unemployment rose to 4.1% in April despite the increase in hiring — the result of a workforce swollen by record-high immigration.

Unemployment

Real per capita income tells a more depressing tale for consumers, declining more than 5.0% p.a. in 2023.

Real Per Capita Disposable Income

Household mortgage arrears have climvbed to 0.70%, the highest rate in the last 8 quarters.

Mortgage Arrears

Source: Equifax

Insolvencies

All is not well in the business sector despite the composite PMI signaling expansion. Insolvencies (green) soared to a monthly high of 1,136 in March.
Insolvency Trends

Source: Equifax

Late payments are also rising, with the average days beyond terms rising to 6.5 days in Q1 of 2024, the highest since 2020.

Days Beyond Terms

Source: Equifax

Cyclical Sectors

The construction sector has been hard hit, with 2758 insolvencies, or 2.1% of all business entities, in Q1 of 2024.

Construction Insolvency

Source: Equifax

Accommodation and food services had a lower number of insolvencies, at 1484 in Q1, but is a higher 3.3% of all entities.

Insolvency Volumes by Sector

Source: Equifax

Trade payment data also flags financial stress in the construction sector, with average days beyond terms rising to 12.3 days in Q1 of 2024, from 10.2 days in the preceding quarter.

Trade Payments

Source: Equifax

Conclusion

Australia is already in a real recession, with real per capita GDP and real disposable income both falling. This is disguised by a massive surge in immigration which has kept aggregate GDP growth above zero.

Real GDP grew 0.2% in Q4 of 2023 but per capita GDP declined by 0.3%. Annual GDP growth of 1.5% for 2023 falls to -1.0% when measured per capita.

Real GDP per Capita

Construction and Accommodation & Food Services are the largest cyclical employers in the economy:

Employment by Sector

Household finances may receive a boost from the latest budget but unemployment is expected to rise as the number of small business failures increases.

Acknowledgements

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