The ASX 200 is testing resistance at 5800 after a weak retracement. Rising Twiggs Money Flow troughs above zero signal strong buying pressure. Breakout above 5800 is highly likely and would signal a test of 6000*.
* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000
From Eryk Bagshaw & Peter Martin at SMH:
Confidence in the housing market has collapsed, with the number of Australians describing property as the wisest place to put their savings falling to its lowest level in more than 40 years.
The Melbourne Institute of Applied Economic and Social Research has been asking about the wisest place to store savings since it began its consumer confidence survey in 1974. Real estate has been one of the most popular answers, often eclipsing bank deposits and paying down debt as the wisest place for savings.
Westpac’s Bill Evans: “There is no doubt nervousness about the sustainability of prices.”
Lack of confidence is a vulnerability rather than sign of an imminent collapse. It may also reflect consumer nervousness about record low interest rates (lowest in more than 40 years) and the impact on affordability, and house prices, when rates eventually rise.
Source: Confidence in housing collapses to lowest level in 40 years: survey
Gerard Minack, courtesy of Macrobusiness, explains why the recent rise in commodity prices will not result in a repeat of the last boom.
There are two main ways the last commodity boom boosted domestic activity. Neither seems likely to be repeated now. The first is that the mining sector lifted its investment spending as commodity prices increased (Exhibit 5). Now, however, mining investment is likely to continue to fall (although most of the declines have been seen).
The second way the mining boom filtered through to domestic activity was via fiscal policy. The boom provided a windfall for governments. For the Federal Government the windfall was several percent of GDP….Almost all the revenue windfall was used to fund a discretionary loosening of fiscal policy….. With the budget now in deficit I expect the Federal Government to trouser the latest windfall. (Yes, there will be political pressure on a behind-in-the-polls-government to spend more, but the countervailing political fear is that to spend the windfall now would lead to a politically damaging downgrade to Australia’s sovereign rating.)
The unforeseen consequence of this government profligacy was a spectacular rise in the Aussie Dollar and subsequent decimation of the manufacturing sector.
Source: Minack Special Report: Forget rate hikes – MacroBusiness
Employment and Participation rates are falling.
Wage rate growth is slowing.
Slowing wage rate growth and inflation confirm that the economy is faltering.
The RBA, with one eye on the housing bubble, has indicated its reluctance to cut rates further. Increased infrastructure spending by Federal and State governments seems the only viable alternative.
With the motor industry winding down and apartment construction headed for a cliff, this is becoming increasingly urgent.
Interesting chart from UBS (via Macrobusiness). Movement between 2002 and 2016 for a number of Developed and Emerging Market (DM and EM) countries in the ratio of bank credit to GDP and bank debt to credit.
The good guys are in the top left corner and the bad guys bottom right.
Australia and China are testing record levels of bank credit to GDP, tracing a similar path to Spain. We all know how that ended.
Source: Can Australia dodge the great deleveraging? – MacroBusiness
The Australian Resources sector has been on a tear over the last 12 months, something I was slow to pick up on. China’s PBOC stepped in to boost a slowing economy, sending property prices surging. But now the central bank is tightening monetary policy and housing price growth is slowing.
The ASX 300 Metals & Mining Index is losing momentum, falling below its long-term trendline. Declining Twiggs Money Flow, with peaks near zero, warns of selling pressure.
The fall has slowed advance of the ASX 200. Resistance at 5800 is proving stubborn. Breach of support at 5600 would complete a double top reversal, warning of a primary down-trend. But declining Twiggs Money Flow indicates no more than medium-term selling pressure at present, recovery above 5800 is more likely and would signal a test of 6000*.
* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000
Motor vehicle sales are strong, according to the Federal Chamber of Automotive Industries:
Motor vehicle sales across Australia got off to a solid start in January, with the month’s sales nudging ahead of the same period last year and showing a rise in activity among private purchasers.
Total sales for January, including passenger cars, SUVs, light and heavy commercial vehicles totalled 84,910 for the month, 0.6 percent up on the same month in 2016.
Within the segments, light commercials fell 3.9 per cent, passenger car sales declined slightly (down 0.8 per cent), while SUVs continued their consistent growth pattern with a gain of 3.2 per cent….
But retail sales growth is slowing.
While housing is slowing after a surge in high-density units over the last five years.
Resources exports have been performing well but a slow-down in Chinese housing sales could act as a hand-brake on future growth.
The ASX 200 broke down below its recent consolidation, signaling another test of support at 5600. There is no indication on Twiggs Money Flow of unusual selling pressure and at present I expect support to hold.
* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000
RBA governor Phil Lowe recently made a speech comparing the experiences of Australia and Canada over the last decade. Both have undergone a resources and housing boom. Four charts highlight the differences and similarities between the two countries.
Australia’s spike in mining investment during the resources boom did serious damage to non-mining investment while Canada’s smaller boom had no impact.
Immigration fueled a spike in population growth in Australia, adding pressure on infrastructure and housing.
Both countries are experiencing a housing bubble, fueled by low interest rates and lately by export of China’s property bubble, with capital fleeing China and driving up house prices in the two countries.
Record levels of household debt make the situation more precarious and vulnerable to a correction.
Hat tip to David Llewellyn-Smith at Macrobusiness
The ASX 200 followed-through above 5750 after respecting its new support level at 5600, indicating an advance to 6000*. Rising Twiggs Money Flow signals buying pressure.
* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000
Australian banks are leading the charge, with the ASX 300 Banks Index testing 9000. A trough high above zero on Twiggs Money Flow indicates strong buying pressure. Breakout above 9000 would signal another advance.
Bank profits have declined for the last two years, but Bad and Doubtful Debt Charges are not a major cause.
The main culprit is declining return on equity as banks beefed up capital ratios and risk-weighting on residential mortgages in response to pressure from APRA.
