What we liked

  • US equity markets ripped right back rising 1000 points this week following a surprise rise in inflation. The Dow Jones opened in negative territory falling 100 points but quickly reversed opening losses as participants digested US data released that showed CPI rising more than forecast was a positive indicator of a healthy economy. The dollar declined and gold hit its highest point in nearly three weeks. CPI jumped 0.5% in January, well above market expectations for a 0.3% rise. This has however fueled fears that inflation is about to turn dangerously higher. The likelihood that the Federal Reserve will raise interest rates at least three times this year is a near certainty. The benchmark 10-year yield surged to 2.92% a fresh January, 2014 high.
  • Volatility is stabilsing. The VIX Volatility Index has drifted back down to 27 down from 51 at its peak last week. The decline in volatility has accompanied the recent bounce in equities. Either way, economic and financial conditions in the US are strong, so the spike in the VIX was more of a technical overshoot rather than a fundamental crisis. Volatility is usually just a symptom of the disease that is infecting the market, it’s never the bug.
  • Gold rose this week hitting $1350 on US dollar weakness as investors shifted to the safe haven asset after last week’s rally and upcoming CPI data. Some analysts are saying the rise is coming on the back of potential short covering behaviour by market watchers. Inflation concerns boost the price of gold because the commodity acts as a safe haven against rising prices. However, rising interest rates make gold less attractive in the future because it doesn’t earn interest.
  • The Real Time Payment System is up and running. Three of the big four banks have rolled out a near real-time payment system from Tuesday this week. It’s the biggest overhaul of Australian banking payments infrastructure in the last two decades. CBA, WBC and NAB will now be able to send payments to each other within a minute of pressing send compare with the previous 2-3 days waiting time. ANZ is not launching the service to its customers yet, it is having a few teething problems. It will announce it within the next few weeks.
  • North Korean leader Kim Jong-un is looking like he’s had a change of heart with his neighbor and is looking to mend ties. Kim was impressed with Seoul’s welcome of a high-level delegation that returned to Pyongyang after a three-day visit to the South during the Winter Olympics. Kim sent his nominal head of state and his sister who extended an invitation to South Korean President Moon Jae-in to visit Pyongyang soon. The South Korean PM hasn’t accepted the offer as yet, but if the two can meet and talk in a friendly environment, it would be a massive step towards a peaceful solution.
  • Macquarie’s equity strategy team on the earnings season. So far after the first week there have been 8 beats and 6 misses. There have been downgrades (11) outnumbering upgrades (8) for the FY. Aggregate growth expectations for FY18 have fallen 163bps basis points, from 8.4 per cent to 6.8 per cent amid downgrades to the banks, the strategists said. Small caps have seen smaller downgrades than mid and large caps.

What we didn’t like        

  • Royal Banking Commission is underway. The hearing is underway which is centered around home loans, car loans and credit cards. The banks, financial planners and the wealth industry are under fire from the probe. So far the big four banks, Macquarie and AMP were asked to provide a 50-page submission outlining cases of misconduct since 2008 and also include where conduct has fallen below standards. The real concern is that the commission will uncover hidden skeletons which will tarnish the reputation of the big banks. Strategic change will come at a cost for the banks.
  • NBN Co has admitted that it won’t be able to reach its average revenue target for each home and business connected by 2021 because of its price discounts. Revenue will fall short. Projections for the average revenue per user was to hit $52 by the end of the rollout period. It now looks like it will be $44 up from $43 in December 2016. The company didn’t specify exactly when it would reach $52. NBN Co boss Bill Morrow said “We still expect to get to $52, but it will be probably later in time than we had originally forecast.” It comes at a time when mobile operators are gearing up to launch 5G services. NBN may need to revisit their numbers or they risk losing customers to mobile broadband services, especially if telco’s can sometimes offer quicker speeds.
  • Algorithmic traders are creating havoc. The recent flash crash last week is solely being pointed at computer algorithmic traders which sold out an enormous number of positions at lightning speeds beyond the abilities of a human. These computers also scan news headlines and social media for ‘negative’ words and transact accordingly. For example headlines such as ‘Rising Interest rates’ could see markets sold off in seconds. It’s a scary new world where a whopping +60% of all stock trades are controlled by computers. The worry is that all it can take is one poorly designed algorithm to create a domino effect, wiping trillions off the global market and plunging the world into the next GFC.

Market Indicators