Iron ore tailwinds lift the ASX

Further increases in iron ore prices are predicted. Enrico de la Cruz at Mining.com reports:

Singapore-based steel and iron ore data analytics firm Tivlon Technologies is keeping its price forecast of $150 a tonne by October.

“We expect the launch of infrastructure projects in China to peak in the third quarter and further uplift demand for steel,” it said in a note.

Narrow consolidation is a bullish sign, suggesting another advance.

Iron Ore

The Materials index continues its up-trend. A Trend Index above zero would signal increased buying pressure.

ASX 200 Materials

Financials continue to test resistance at 6450 but face headwinds from the housing market and construction.

ASX 200 Financials

The ASX 200 is testing its 2007 high at 6800. A rising Trend index indicates buying pressure. Penetration of the rising trendline on the index chart is unlikely but would warn of a correction.

ASX 200

We maintain a high level of cash in our Australian Growth portfolio because of expected headwinds from housing and construction.

ASX 200: Iron ore tailwinds continue

The ASX continues to enjoy a massive tailwind, with iron ore spot prices holding above $120/tonne. Prices are expected to moderate, with Brazilian exports recovering. Clyde Russell at Mining.com comments:

“Even if Brazil’s exports do remain slightly below normal, it may be the case that the iron ore forward curve is currently too optimistic. The Singapore Exchange front-month contract closed at $121.24 a tonne on Wednesday, while the six-month contract was at $100.52 and the 12-month at $89.52. This shows traders do expect prices to moderate…”

Iron Ore

The Materials index continues to climb, with rising troughs on the Trend Index signaling buying pressure.

ASX 200 Materials

REITs continue their strong up-trend, in expectation of lower interest rates. The equity (dividend) yield on VAP/ASX 300 REITs has fallen to 4.3%.

ASX 200 REITs

Financials are testing resistance at 6450 but face headwinds from declining house prices and construction work.

ASX 200 Financials

The ASX 200 is headed for a test of its 2007 high at 6830, with a rising Trend index indicating buying pressure. Penetration of the rising trendline on the index chart is not likely but would warn of a correction to test support at 6000.

ASX 200

We continue to maintain a high level of cash in our Australian Growth portfolio.

ASX 200: Materials rocket but Financials fade

Last week I wrote that I had zero confidence in the ASX 200 breakout but you can’t argue with the tape. The ASX 200 retracement respected its new support level at 6350 and commenced a fresh advance. Money Flow completed a trough high above zero, signaling strong buying pressure.

ASX 200

Iron ore is a big contributor, rocketing to $106/tonne.

Iron Ore

Materials followed suit, breaking resistance at 13,500 suggesting a fresh advance.

ASX 200 Materials

The housing rally in response to the recent RBA rate cut has fizzled out, with CoreLogic reporting lower auction clearance rates last weekend:

The combined capital city final auction clearance rate came in at 48.3 per cent last week, which was lower than the 58 per cent the previous week. The lower clearance rate was across a lower volume of auctions over what was the Queen’s birthday long weekend, which saw 805 homes taken to auction, down on the 1,661 auctions the prior week.

The Financials advance has also lost impetus, with lower peaks on the Money Flow Index warning of increased selling pressure. Reversal below 6000 would warn of another correction.

ASX 200 Financials

The market is discounting the potential impact of a US-China trade war on Australia, relying on a large Chinese injection of fiscal stimulus to steady the ship. They may be right but Chinese officials have been talking this down for the past few months.

We hold 46% of our Australian Growth portfolio in cash and fixed income securities because of high uncertainty from (1) the US-China trade war; and (2) declining house prices and their potential impact on under-capitalised banks — leveraged at nearly 20 times common equity (CET1).

ASX 200 rises despite falling Dollar

The Aussie Dollar was trading above 80 US cents 18 months ago but has now broken support at 70 US cents. The immediate target is 68 cents but our long-term target is 60 cents, the lows of 2008.

AUD/USD

While this may benefit mining and other export-led sectors, the medium-term impact may be increased cost of offshore funding for the major banks. The chart below, sourced from the RBA, shows major banks rely on offshore funding of close to $650 billion (between 18% and 19% of total funding of $3.4 trillion).

Major Bank Funding

The ASX 200, buoyant after a surprise election result, broke resistance at 6400. Expect retracement to test the new support level, shown at 6350/6400 below on the daily chart. Respect would confirm a fresh advance.

ASX 200

I remain cautious of Australian stocks because of two factors: (1) potential fallout from a US-China trade war; and (2) declining housing prices and construction activity in Australia. With (common equity Tier 1) leverage ratios close to 5%, banks are under-capitalized and could act as “an accelerant rather than a shock-absorber” with any external shocks.

ASX 200 recovers as Aussie Dollar plunges

The Aussie Dollar broke long-term support at 70 US cents (as shown on the quarterly chart below), closing below 69 cents. Target for the decline is 60 cents.

AUD/USD

The ASX 200, reflecting the counter-balance between its two largest sectors, recovered to test resistance at 6350. The Trend Index trough above zero signals buying pressure.

ASX 200

Financials (32% of the ASX 200) penetrated its rising trendline to warn of a correction. Follow-through below 5800 would indicate a test of primary support at 5300.

ASX 200 Financials

Materials (18% of the index), on the other hand, rallied strongly after respecting support at 12500. Follow-through above 13500 would signal another advance.

ASX 200 Materials

I would be cautious of any breakout on the ASX 200 and would wait for retracement (respecting the new support level) to confirm the advance.

ASX 200 and the Banks

The ASX 200 retreat below support level at 6350 has been gentle, with a long tail indicating that buying support remains. The Trend Index likewise shows only a moderate decline. Respect of support at 6000 would be a bullish sign.

ASX 200

Financials are the largest sector, comprising 32.1% of the ASX 200 according to S&P Indices. Retracement has so far been gentle and respect of the new support level at 6000 would be a bullish sign.

ASX 200 Financials

Apart from a declining housing market and the RBNZ call for more than $8 billion in additional equity capital (estimated by S&P Global Ratings), the four major banks face declining margins.

Net Interest Income (as % of Total Assets) has rallied since 2015 but remains in a long-term down-trend, with a projected average of 1.7%. Fee income (right-hand scale) has declined to below 0.50% of total assets, while other income (RHS) fluctuates around 0.20%.

Banks Income as % of Total Assets

Source: APRA – Major Banks

If we compare income to operating expenses, the gap between non-interest income (fees, commissions & other income) and operating expenses is widening. Combined with declining net interest margins and increasing capital requirements, the heady days of strong profit growth may be nearing an end.

Banks Income & Expenses as % of Total Assets

Source: APRA – Major Banks

I am cautious of Australian banks, more because of the headwinds they face over the next two years than the long-term outlook, but declining margins do not help. We hold more than 40% in cash and fixed interest in the Australian Growth portfolio.

Materials (the second largest sector at 18.1%) are undergoing a modest correction. Respect of support at 12500 would be a bullish sign. Declining Money Flow peaks, however, warn of strong selling pressure and a test of 12000 remains likely.

ASX 200 Materials

ASX 200 bull trap

The ASX 200 retreated below its new support level at 6350, warning of a bull trap. Declining Money Flow peaks indicate selling pressure. Expect retracement to test support at 6000.

ASX 200

With the Aussie Dollar testing support at 70 US cents, international investors are noticeably skittish, as illustrated by price action in REITs over the past few weeks. Penetration of the rising trendline warns of a correction.

ASX 200 REITs

ASX 200 Financials is also retracing, to test its new support level at 6000. Lower peaks on the Money Flow indicator warn of secondary selling pressure.

ASX 200 Financials

Banks face headwinds from a declining housing market and the RBNZ call for an additional $8.1 billion in common equity capital (as estimated by S&P Global Ratings).

Materials have started a correction after penetrating its rising trendline. Expect a test of support at 12000. Declining Money Flow peaks warn of strong selling pressure.

ASX 200 Materials

I remain cautious on Australian stocks, especially banks, and hold more than 40% in cash and fixed interest in the Australian Growth portfolio.

ASX 200 breakout

ASX 200 Financials broke resistance at 6050, signaling continuation of the up-trend after a weak correction. Rising troughs on the Trend Index indicate buying pressure. The next target is the August 2018 high at 6450.

ASX 200 Financials

Low inflation, with March Quarter CPI at 0%, increases the chance of another RBA rate cut. Short-term market response to this has been positive but we need to remember that the RBA will only cut rates, which are already at record lows, if the economy is going down the gurgler.  Banks also face headwinds from a declining housing market and the RBNZ call for an additional $8.1 billion in common equity capital (as estimated by S&P Global Ratings).

Materials penetrated the rising trendline after encountering resistance at 13500. Expect another test of support at 12500.

ASX 200 Materials

The ASX 200 broke resistance at 6350, signaling another advance. Expect retracement to test the new support level (at 6350). Respect would strengthen the bull signal.

ASX 200

Long-term (LT) target for an advance is 7400 but I remain cautious on Australian stocks, especially banks, and hold more than 40% in cash and fixed interest in the Australian Growth portfolio.

I suspect that the RBA will resist cutting rates unless the situation gets really desperate. Ultra-low interest rates encourage risk-taking and speculative behavior, offering short-term gain but courting long-term disaster. Walter Bagehot, editor of The Economist, observed more than 100 years ago: “John Bull can stand many things, but he cannot stand 2%.” Sound economic management requires that central bankers make the hard choices, resisting pressure from commercial banks and politicians.

ASX 200 divergence

REITs and Utilities found support, partially recovering from their sell-off last week.

ASX 200 REITs

Financials continue to test support at 5800; breach would signal another test of primary support at 5300.

ASX 200 Financials

The RBA sums up the outlook for banks in its April 2019 Financial Stability Review:

“Analysts expect minimal growth in bank profits over the year ahead. Net interest income growth is expected to be below average as credit growth slows further and NIMs [net interest margins] remain under pressure. Bad and doubtful debt charges are also expected to pick up a little from their current very low level. The final cost of remediation for misconduct identified over recent years is uncertain, and could exceed existing provisions, while spending on compliance and IT may remain elevated in order to address some of the recommendations of the Royal Commission. Overall, there appears to be greater-than-usual uncertainty about the future profit outlook for banks because of the increased scrutiny on banks and the weaker outlook for property prices and housing credit growth.”

Materials encountered resistance at 13500, with a lower peak on the Trend Index warning of selling pressure. Another test of support at 12500 is likely.

ASX 200 Materials

The ASX 200 is heading for another test of resistance at 6350 but divergence with a declining Trend Index continues to warn of a correction. Expect stubborn resistance at 6350, followed by another test of 6000. Breach of 6000 would signal another correction to test primary support at 5400/5500.

ASX 200

I remain cautious on Australian stocks, especially banks, and hold more than 40% in cash and fixed interest in the Australian Growth portfolio.

ASX 200 offshore investors retreat

The ASX has undergone a sell-off in the last two days, presumed to be offshore investors withdrawing from Australian investments.

Bell Direct equities analyst Julia Lee (Thursday) said it appeared that overseas investors – or even just one large player – had pulled their money from the Australian market, as losses were concentrated among the ASX’s top 20 companies. (thebull.com.au)

Worst hit were REITs.

ASX 200 REITs

Followed by Utilities.

ASX 200 Utilities

ASX 200 Financials are testing support at 5800, while the Trend Index warns of a correction. Breach of 5800 would signal another test of primary support at 5300.

ASX 200 Financials

Materials continue their advance, benefiting from the iron ore windfall.

ASX 200 Materials

The ASX 200 retreated from resistance at 6350. Declining Trend Index warns of a correction. Breach of 6000 would confirm.

ASX 200

I remain cautious on Australian stocks and hold more than 40% in cash and fixed interest in the Australian Growth portfolio.