ASX 200: Bold play for Aussie Banks
The ASX 300 Banks Index jumped sharply this week as investors made a bold move into the big four banks. Banks have been under the pump for months, with plenty of negative publicity from the Royal Commission accompanied by media coverage of falling house prices. The Aussie Dollar also rallied, suggesting the buyers were offshore.
Have they got it right? Only time will tell. Trying to catch a falling knife is a hazardous endeavor. What looks cheap at the time often ends up being very expensive with the benefit of hindsight.
Bulls would say that the banks are a dominant oligopoly, generating strong cash-flows and un-threatened by international competition. Bears would say they are under-capitalized, poorly managed and sitting atop the mother of all housing bubbles. Technical analysts would say that the Banks index remains in a primary down-trend and this is most likely nothing more than a secondary bear market rally.
But there are broader implications. The bank rally lifted the ASX 200 through resistance at 6150, signaling another primary advance. A Trend Index trough at the zero line flags buying pressure. Target for the advance is the October 2007 high at 6750.
This looks like a bold play by a long-term value investor, taking advantage of the weak Aussie Dollar and strong bearish sentiment towards banks. Where one leads, others are likely to follow.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.
Gold weakens as Dollar dominates
The Dollar Index continues to test resistance at 95.
Mohammed El-Erian believes the Dollar is underpriced:
“…the dollar index is now at a 2018 high and, IMO, markets as a whole are yet to price fully the growth and policy differentials that favor the US over many other countries.”
Expect another test of short-term support at 93.20 but respect is likely and breakout above 95 would signal another advance.
A strong Dollar would suggest weaker gold prices (in Dollars). Spot gold breached support at $1280/ounce, warning of a test of primary support between $1240 and $1250. Trend Index peaks below zero flag selling pressure.
Australian gold stocks face a different set of drivers. The strong greenback weakened the Aussie Dollar, breach of primary support at 75 warning of a decline to 70 US cents. A long tail on the latest candle suggests a continuing arm-wrestle between buyers and sellers. But the Trend Index peak below zero indicates, in the medium-term, that sellers outweigh buyers.
Buoyed by a weaker Aussie Dollar, the All Ordinaries Gold Index is rallying to test resistance at 5250. Breakout would signal another advance but retracement is likely to first test support at the rising trendline.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.
ASX 200 strengthens despite banks and iron prices
Iron ore prices are weakening, with spot testing support at $62/tonne. A Trend Index peak below zero would complete a bearish outlook, warning of strong selling pressure. Breach of support at $58 would confirm a primary down-trend.
The ASX 300 Metals & Mining index is testing resistance at 4000, remaining in a strong up-trend despite weaker ore prices.
Australian banks face a tough time over the next year or two but the ASX 200 index continues to strengthen despite weakness in its largest sector. A Twiggs Money Flow (13-week) trough at the zero line signals interest from buyers and breakout above 6150 would signal a primary advance, with a target of the October 2007 high at 6750.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.
Aussie gold stocks rally as the greenback strengthens
The Dollar Index rallied to test resistance at 95 in response to the latest Fed rate hike. Short retracement is a bullish sign.
Spot Gold retreated to $1280/ounce. Penetration of the rising trendline warns of a correction to test primary support at $1250. A Trend Index peak below zero warns of strong selling pressure.
Fortunately for Australian gold stocks, the Aussie Dollar broke primary support at 75, warning of a decline to 69/70 US cents. The Trend Index peak below zero warns of strong selling pressure.
The weaker Aussie Dollar boosted local gold stocks, with the All Ordinaries Gold Index breaking through resistance at 5100. Follow-through above 5250 would confirm another advance but expect retracement to first test the new support level.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.
Zombie banks or zombie economies?
The last three decades was the era of zombie banks, with financial crises threatening the very survival of our financial system. Major banks close to the edge of the precipice, first in Japan but followed by the USA and Europe, were only rescued by drastic action by central banks. The flood of easy money kept the zombie banks afloat but every action has unintended consequences, especially when you are the Fed, BOJ or ECB.
Now that the Fed is attempting to unwind its swollen $4.4 trillion balance sheet — see The Big Shrink Commences — and normalize interest rates, Stephen Bartholomeusz at The Age highlights some of the unforeseen consequences:
US rate hikes are already sending threatening ripples through other economies as capital flows towards the US and the US dollar strengthens.
Argentina has sought assistance from the International Monetary Fund. Turkey, Indonesia, the Philippines, Brazil, India and Pakistan have all been forced to raise their rates to defend their currencies.
US monetary policy and its rate structure is setting it apart from most of the rest of the developed world in a fashion that will impose pressure on economies that may be more fragile than they might previously have been regarded in an ultra-low global rates environment.
…..A consequence of the policies pursued by the Fed, the ECB and the Bank of Japan since 2008 has been a significant increase in global debt – at government, corporate and household levels – as ultra-low rates and torrents of liquidity ignited a global borrowing binge.
There was a particular appetite in developing economies for US dollar-denominated debt, which became abundant and cheap as US investors were incentivised and enabled by the Fed to take on more risk in return for higher returns.
The US rate rises, combined with a stronger US dollar, are now putting a squeeze on emerging market economies.
If the ECB were to also start unwinding its stimulus, economies and banking systems within the weaker southern regions of the eurozone would come under intense pressure, along with more debt-laden companies.
It shouldn’t come as a surprise to anyone that after a decade of unprecedented policy interventions in economies and markets there could be unintended consequences that emerge as those policies are wound back.
The ECB indicated overnight that it will halt bond purchases at the end of 2018 and plans to keep interest rates accommodative “through the summer of 2019 and in any case for as long as necessary…”
ECB unwinding still appears some way off but tighter monetary conditions emanating from the Fed may be sufficient. Developing economies that gorged on low-rate US dollar-denominated debt during the liquidity surge are finding themselves in difficulties as the tide goes out.
Meanwhile in Australia
From Karen Maley at the AFR:
Australian banks are being squeezed by higher borrowing costs as the US Federal Reserve accelerates its interest rate hikes and drains liquidity from global financial markets…..
The woes of the local banks have been exacerbated by an unexpected and savage spike in a key Australian short-term interest rate benchmark – the three-month bank bill swap rate, or BBSW, in the past few weeks.
Analysts estimated that the spreads paid by Australian banks have climbed by close to 40 basis points since the beginning of the year, which has swollen the wholesale borrowing costs of the country’s banks by some $4.4 billion a year.
The ASX 300 Banks Index is headed for a test of primary support at 7000/7200. Breach of 7000 would warn of another decline, with a long-term target of the September 2011 low at 5000.
Aussie banks are being squeezed by higher interest rates on their international borrowing but are unable to pass this on to borrowers for fear of upsetting the local housing market. House prices are already under the pump, especially in the top end of the market.
Zombie banks would be too harsh but Aussie banks are in for a rough time over the next year or two.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.
Gold benefits from Dollar weakness
The Dollar Index encountered resistance at 95 and is now retracing to find support. Support above 91 would be bullish, while breach of 91 would see another test of primary support at 88.50.
10-Year US Treasury yields are likely to face stubborn resistance at 3.0 percent until threats to the European Union emanating from Italy’s new populist government are resolved. Breakout above 3.0 percent would signal the end of the 3 decades-long secular bull market in bonds — and increase selling pressure on gold.
Spot Gold, benefiting from the weaker Dollar, respected its rising trendline. Recovery above $1300/ounce would suggest another rally, while crossover of the Trend Index above zero would strengthen the signal.
Australia’s All Ordinaries Gold Index continues its struggle with resistance at 5100, while the Aussie Dollar holds above support at 75 US cents. Penetration of the rising trendline at 4950 would warn of a correction to test primary support at 4600. Breakout above 5100 remains more likely, with a rising trend Index indicating moderate buying pressure.
The Australian Dollar met resistance at its descending trendline, around 76.75 US cents. Expect another test of primary support at 75. If a Trend Index peak forms below zero, that would warn of strong selling pressure. Breach of primary support at 75 would signal a decline to 69/70 US cents — and strong demand for Australian gold stocks.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.
12 Charts on the Australian economy
Australian GDP grew at a robust 3.1% for the year ended 31 March 2018 but a look at the broader economy shows little to cheer about.
Wages growth is slowing, with the Wage Price Index falling sharply.
Falling growth in disposable income is holding back consumption (e.g. retail spending) and increasing pressure on savings.
Housing prices are high despite the recent slow-down, while households remain heavily indebted, with household debt at record levels relative to disposable income.
Housing price growth slowed to near zero and we are likely to soon see house prices shrinking.
Broad money growth is falling sharply, reflecting tighter financial conditions, while credit growth is also slowing.
Mining profits are up, while non-mining corporation profits (excluding banks and the financial sector) have recovered to about 12% of GDP.
But business investment remains weak, which is likely to impact on future growth in both profits and wages.
Exports are strong, especially in the Resources sector. Manufacturing is the only flat spot.
Iron ore export tonnage continues to grow, while demand for coal has leveled off in recent years.
Our dependence on China as an export market also continues to grow.
Corporate bond spreads — the risk premium over the equivalent Treasury rate charged to non-financial corporate borrowers — remain low, reflecting low financial risk.
Bank capital ratios are rising but don’t be fooled by the risk-weighted percentages. Un-weighted Common Equity Tier 1 leverage ratios are closer to 5% for the four major banks. Common Equity excludes bank hybrids which should not be considered as capital. Conversion of hybrids to common equity was avoided in the recent Italian banking crisis, largely because of the threat this action posed to stability of the entire financial system.
Low capital ratios mean that banks are more likely to act as “an accelerant rather than a shock-absorber” in times of crisis (2014 Murray Inquiry). Professor Anat Admati from Stanford University and Neel Kashkari, President of the Minneapolis Fed are both campaigning for higher bank capital ratios, at 4 to 5 times existing levels, to ensure stability of the financial system. This is unlikely to succeed, considering the political power of the bank sector, unless the tide goes out again and reveals who is swimming naked.
The housing boom has run its course and consumption is slowing. The banks don’t have much in reserve if the housing market crashes — not yet a major risk but one we should not ignore. Exports are keeping us afloat because we hitched our wagon to China. But that comes at a price as Australians are only just beginning to discover. If Chinese exports fail, Australia will need to spend big on infrastructure. And infrastructure that will generate not just short-term jobs but long-term growth.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.
Is ASX 200 resurgence sustainable?
The ASX 200 found support at 5950/6000, a bullish sign. Large bearish divergence on Twiggs Money Flow (13-week) continues to warn of selling pressure but breakout above 6150 would signal a fresh primary advance. Breach of 5950 is unlikely at present, but would warn of a test of primary support at 5650/5750.
The ASX 300 Banks decline continues, heading for a test of its 2016 low at 7200.
The ASX 300 Metals & Mining index breakout above 4000 is likely, offering a target of 4200.
The broad index looks bullish but I have two concerns. First is the weak banking index, representing the largest sector in the ASX 200. Second, iron ore prices are weakening. Spot prices are testing support at $62/tonne. A Trend Index peak below zero looks likely, and would warn of strong selling pressure. Breach of support at $58 would signal a primary down-trend.
GDP growth recovered to 3.1% for the year ending 31 March 2018, on the back of strong exports, but the overall report card for the economy remains weak.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.
Gold benefits from Dollar weakness
The Dollar Index encountered resistance at 95 and is now retracing to find support. Support above 91 would be bullish, while breach of 91 would see another test of primary support at 88.50.
10-Year US Treasury yields are likely to face stubborn resistance at 3.0 percent until threats to the European Union emanating from Italy’s new populist government are resolved. Breakout above 3.0 percent would signal the end of the 3 decades-long secular bull market in bonds — and increase selling pressure on gold.
Spot Gold, benefiting from the weaker Dollar, respected its rising trendline. Recovery above $1300/ounce would suggest another rally, while crossover of the Trend Index above zero would strengthen the signal.
Australia’s All Ordinaries Gold Index continues its struggle with resistance at 5100, while the Aussie Dollar holds above support at 75 US cents. Penetration of the rising trendline at 4950 would warn of a correction to test primary support at 4600. Breakout above 5100 remains more likely, with a rising trend Index indicating moderate buying pressure.
The Australian Dollar met resistance at its descending trendline, around 76.75 US cents. Expect another test of primary support at 75. If a Trend Index peak forms below zero, that would warn of strong selling pressure. Breach of primary support at 75 would signal a decline to 69/70 US cents — and strong demand for Australian gold stocks.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.