I appeared live on Channel News Asia again this morning at 6:20am SGT. My questions and my responses in the form of brief notes are below:
Q1. What can we expect from the Australian market today, after yesterday’s losses?
There is likely to be a slight decline in the ASX today. It has been in an established medium term trend of late yet well supported by the 5400 level over the last month and more recently the 5500 level. It has yet again run into resistance around 5650 and 5700 which has turned it around in the last day or so. We are also seeing weakness across Asia with an index showing Asian equities at close to 2015 lows yesterday. Futures markets are pointing to a small decline in the ASX200 and after weakness in European markets overnight, including Greece’s reopening for strong falls and a poor U.S. lead, this is now widely expected.
Q2. Australia’s earnings season kicks off this week. Will it give another leg up for the market to rally?
I am not that confident. We have seen the RBA cut rates twice this year already to stimulate the economy and we have also seen Federal budget measures to do something similar. It is unlikely that such measures have had a profound effect on company’s earnings in the first six months of this year. These measures are more likely to have a more medium term impact and therefore have show some signs in another six month’s time.
Q3. Will the Reserve Bank of Australia cut interest rates at its policy meeting today?
Highly unlikely. We have seen two rate cuts already this year and they are now clearly in a holding pattern to see how things unfold. Interestingly chatter has intensified about the possibility of a further rate cut before the end of 2015. “We expect the [Reserve Bank of Australia] board will decide to keep rates on hold,” says Bill Evans, Westpac’s chief economist. “Markets are in full agreement with this view with only a negligible probability of a rate cut being priced in. It is a different story for November with market pricing oscillating between 60 per cent and 80 per cent probability of a cut by then.”
Q4. Home prices across Australia’s capital cities surged in July as demand in Sydney and Melbourne stayed red hot. How long will the boom last?
What a great question! No one knows and the opinions on this are divided. We have seen a surge in house prices and a lot has been attributed to foreign investment. It has to end sometime and no one can really articulate when this will be.
Q5. The Australian dollar is often used as a liquid proxy for bets on China. Is there some weakness developing in the Australian currency?
There is definitely weakness in the Australian dollar and it is likely to continue. Last year the AUD/USD fell strongly from around 0.95 down to 0.75. It has spent most of this year trading in a range roughly between 0.75 and 0.7850 and throughout the last month it has drifted lower to new six year lows near 0.72. For a couple of weeks in July it did well to arrest the slide and consolidate around 0.74 however now it has moved lower and is threatening to continue its decline. In the last few days the 0.73 level has been providing resistance and the 0.74 level just above it it likely to perform the same role should the AUD/USD rally higher. The downside risk is real and the AUD/USD could easily fall lower and below 0.70 is well within reach.
Q6. Gold is down again overnight below $1090. What’s the outlook for the rest of the year?
Nothing good. Several years ago we saw gold climb $1800 as there was a genuine demand for a ‘safe haven’ asset however this demand has clearly declined sharply. The fact that we are likely nearing when the Fed raises rates for the first time in 9 years, echoes the decline for safe havens. Even though $1000 is a little distance away, it is well within reach and if the demand for safe haven assets continues to decline, then gold has some more distance to go yet before bottoming out. I see a slow and steady decline for gold for the remainder of this year and beyond.
