The ASX 200 respected its new support level at 5600. Twiggs Money Flow respected the zero line, suggesting buying pressure. Follow-through above 5750 would offer a target of 6000*.
* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000
ASX 200 correction
The ASX 200 continues to test its new support level at 5600. Twiggs Money Flow is now declining, reflecting medium-term selling pressure. Breach of support is likely and would test the lower trend channel around 5500 but the primary up-trend is unchanged.
* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000
The ASX 300 Banks Index has undergone a sell-off in the last few weeks, weighing heavily on the broader index. Declining Twiggs Money Flow indicates medium-term selling pressure. Respect of support at 8000 would indicate that the up-trend is intact.
Australia at risk as USD rises
NAB are predicting that the RBA will cut rates twice in 2017.
This ties in with the Credit Suisse view: if Donald Trump succeeds in reducing the US trade deficit, it will cause a USD shortage in international markets. And, in Australia, “a USD shortage tends to exert downward pressure on rates, bond yields, the currency and even house prices.”
Macrobusiness joins the dots for us: “a rising USD this year is very bad for commodity prices and national income while being bearish for interest rates and the AUD.”
BIS: High household debt kills growth | Macrobusiness
From Leith van Onselen, reproduced with kind permission from Macrobusiness:
Last month I showed how Australia’s ratio of household debt to GDP had hit 123% of GDP – the third highest in the world – according to data released by the Bank for International Settlements (BIS):
Martin North also compiled separate data from the BIS, which showed that Australia’s household debt servicing ratio (DSR) is also the third highest in the world:
Despite record low mortgage rates, Australia’s mortgage slaves are still sacrificing a far higher share of their income to pay mortgage interest (let alone principal) than when mortgage rates peaked in 1989-90:
Now the BIS has released a working paper, entitled “The real effects of household debt in the short and long run”, which shows that high household debt (as measured by debt to GDP) has a significant negative long-term impact on consumption and growth. Below are the key findings:
A 1 percentage point increase in the household debt-to-GDP ratio tends to lower growth in the long run by 0.1 percentage point. Our results suggest that the negative long-run effects on consumption tend to intensify as the household debt-to-GDP ratio exceeds 60%. For GDP growth, that intensification seems to occur when the ratio exceeds 80%.
Moreover, the negative correlation between household debt and consumption actually strengthens over time, following a surge in household borrowing. What is striking is that the negative correlation coefficient nearly doubles between the first and the fifth year following the increase in household debt.
As shown in the table above, Australia’s household debt-to-GDP ratio was 123% as at June 2016 (higher now) – way above the BIS’ 80% threshold by which GDP growth is adversely impacted.
According to Martin North:
This is explained by massive amounts of borrowing for housing (both owner occupied and investment) whilst unsecured personal debt is not growing. Such high household debt, even with low interest rates sucks spending from the economy, and is a brake on growth. The swelling value of home prices, and paper wealth (as well as growing bank balance sheets) do not really provide the right foundation for long term real sustainable growth.
Another obvious extrapolation is that there could be carnage when mortgage rates eventually rise from current historical lows.
ASX 200 strengthens
The ASX 200 is testing its new support level at 5600. Rising Twiggs Money Flow indicates medium-term buying pressure. Respect of 5600 is likely and would signal an advance to 6000*.
* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000
Small cap stocks, represented by the ASX Small Ordinaries Index, are weaker, indicating the market remains risk-averse. Twiggs Money Flow below zero continues to indicate selling pressure.
Intent as the enemy of truth | On Line Opinion
From Jennifer Marohasy:
When all 1,655 maximum temperature series for Australia are simply combined, and truncated to begin in 1910 the hottest years are 1980, 1914, 1919, 1915 and 1940.
…..Considering land temperature across Australia, 1914 was almost certainly the hottest year across southern Australia, and 1915 the hottest across northern Australia – or at least north-east Australia. But recent years come awfully close – because there has been an overall strong warming trend since at least 1960, albeit nothing catastrophic.
……there is compelling evidence that the Bureau of Meteorology remodels historical temperature data until it conforms to the human-caused global warming paradigm.
I would like to see more open debate around this issue rather than the typical “trust me I’m an expert” or “the science is settled” response.
Source: Intent as the enemy of truth – On Line Opinion – 9/1/2017
Best time to short commodities since 2012
From Vesna Poljak:
….China’s stimulus is finite and demand for raw materials will collapse without it.
Australian Atul Lele, the Bahamas-based chief investment officer of private wealth manager Deltec, says all monetary and fiscal stimulus has a natural conclusion – “it just ends” – and traditional indicators of commodity prices such as global growth and liquidity conditions have been outrun by prices already.
“Right now, commodity prices are consistent with 8 per cent global industrial production. If we saw that, ex of the financial crisis recovery, it would be the strongest rate of global industrial production growth since 1981, at least. Now I’m bullish global growth and more bullish than most people, but it’s not going to happen and even if it does happen, all you’ve done is justify current commodity prices. So why would you buy a resource stock now?”
China continues to inject stimulus to revive its economy but that is making its financial system increasingly unstable. Credit growth in excess of 30% of annual GDP warns of a banking crisis according to the BIS. And shrinking foreign reserves flag that the currency is under pressure.
China faces the impossible trinity. According to David Llewellyn-Smith at Macrobusiness, a country pegged to the Dollar can only achieve two out of the following three:
- a stable exchange rate
- independent monetary policy
- free and open international capital flows
At present all three are under pressure.
Source: Best time to short commodities since 2012 says Deltec’s Atul Lele
ASX risk off
The ASX 200 is retracing to test its new support level at 5500. Bearish divergence on 21-day Twiggs Money Flow warns of short-term selling pressure. Recovery above 5600 would signal a primary advance to 6000*.
* Target medium-term: 5600 + ( 5600 – 5200 ) = 6000
Small cap stocks, represented by the ASX Small Ordinaries Index, however, indicate the market is adopting a risk off approach at present. While institutional stocks advance, the small caps index is undergoing a sell-off, with Twiggs Money Flow reflecting strong selling pressure.
A line has formed over the last 7 weeks. Breakout below this level would warn of another decline (and a primary down-trend).
ASX: Steam or froth?
The ASX 200 broke resistance at 5500. Follow-through above 5600 would confirm a primary advance with a long-term target of 6000*. Rising Twiggs Money Flow indicates medium-term buying pressure.
* Target medium-term: 5600 + ( 5600 – 5200 ) = 6000
The ASX 300 Banks Index has followed through after breaking resistance at 8000. Expect retracement to test the new support level but respect is likely.
What could go wrong?
….Apart from a precarious property bubble in China fueling commodity exports, a property bubble in Australia fueled by record low interest rates and equally precarious immigration flows, declining business investment and slowing wages growth.
The ASX price-earnings ratio is close to historic highs, suggesting we are in Phase III of a bull market — where stocks are advanced on hopes and expectations of future growth rather than on concrete results. By all means follow the rally, but keep your stops tight.
Are stocks overpriced?
Some good discussion on our forum regarding current high stock valuations, based more on hopes than on earnings.
This chart of Price-Earnings ratios highlights the problem. PEs for both the MSCI World Index (ex-Australia) and the ASX 200 are close to historic highs (after the Dotcom bubble).
Strong earnings growth would soon fix this but there is little sign of that at present.
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