Originally published by BetaShares
The Week in Review
- The key development last week was the solid US payrolls report (employment +235K, unemployment rate dropping to 4.7%) which makes a Fed rate hike this Thursday morning (Sydney time) a virtual certainty. Note bond yields rose last week, but US 10-years have yet to break their recent 2.3-2.6% range - this could be the week depending on the hawkishness of the Fed's accompanying statement. In other news, oil dropped as stale longs gave up on a further rally in light of rising US supply and ample inventories, while the European Central Bank hinted at an eventual winding back of its still aggressive policy stimulus. After making gains in recent weeks, the US Dollar Index consolidated somewhat but (along with bond yields) could be poised to move higher. And Trump was reasonably well behaved!
- Closer to home, the RBA left rates on hold and remained fairly "neutral" in terms of outlook - though perhaps a touch impatient with the ongoing strength in investor home borrowing. A pull back in iron ore prices also continued, which further hurt resource stocks, while financials were well supported as bond sensitive sectors, like listed property, took a hit. Likely much to the consternation of the the RBA and APRA, Friday's housing finance report revealed ongoing strength in investor lending!
Likely Highlights in the Week Ahead
- Here's hoping Trump will again not figure prominently in the market headlines, with focus likely to be on the Fed. A Fed hike is now such a well anticipated move, however, chances are that markets won't react all that much unless the statement is very hawkish and increases the odds of another near-term move. China's monthly "data dump" takes place tomorrow, which should again show their economy ticking along reasonably well (and even it was not, the Government probably wouldn't tell us anyway!). Dutch elections are on Wednesday, with the latest polls suggesting a worst case scenario of a far right dominated parliament and with extremist Geert Wilders as Prime Minister looking less likely (but haven't we heard that before?). The Bank of Japan also meets Thursday, with some risk it could revise up its 10-year bond yield target level from zero given inflation has lifted recently and the economy appears to be doing OK.
- Locally, interest will be on whether the iron ore pull back continues and whether the big January surge in the National Australia Bank business conditions index is maintained when the February survey is released on Wednesday.
The Wrap
- The US equity rally looks increasingly over extended with a pull back likely - perhaps due to Fed tightening and/or impatience with Trump's erraticism and lack of clarity with regard to near-term fiscal stimulus. That said, equities have enjoyed a "Goldilocks" environment in recent months, with an improving growth and earnings outlook, but a lack of follow through in terms of higher bond yields and the $US. In recent weeks, however, bond yields and the $US started to move higher - so watch this space! Perhaps checking the $US rise, however, are growing hints that Europe and Japan might also begin to wind back stimulus - though this would clearly add to upward pressure on global bond yields. Don't forget that global banks should be among the biggest beneficiaries of higher bond yields, and local investors can get access to this trade through the BetaShares' BNKS ETF.
- Locally, the RBA seems firmly on hold, with APRA likely to provide the first line of attack should officials decide to further tackle investor activity in the housing sector. As a result, the Australian dollar could come under further downward pressure this week given the recent pull back in commodity prices and growing talk of policy tightening elsewhere across the globe. Provided the pull back in iron ore prices remains only moderate (i.e. prices hold around $US 70 or so), this could provide a buying opportunity in resource stocks such as through the BetaShares' QRE ETF.