Weekly Wrap

Market Update

Calendar Icon Friday, 21st May 2021

ASX 200 Index (XJO)

This week we are looking at the STW ETF, which is a replication of the XJO. This allows us to interpret the Accumulation/ Distribution alerts which don’t appear on the XJO chart. Below we can see that the STW registered a couple of Distribution alerts about 10 days ago. From a technical perspective, it is worth keeping an eye on the STW ETF chart for possible movements of the ASX 200.

On the chart, the MACD is turning negative, the Stochastics have moved lower and the Trailing ATR stops have moved above the share price. We appear to be at the start of a change in trend. A break of 6900 points would indicate that the bears have gained control of the market.

STW Chart

Budgets and Forecasts

Last week the Treasurer handed down the annual Budget and it came with a big increase in spending and a large assumption that the economy will return to ‘normal’ pre-COVID19 levels next year. What needs to happen for the economy to get back to these levels is a combination of events that haven’t occurred for some time.

A large component of the Budget forecast is heavily reliant on the assumption that consumer spending is going to bounce back with the support of a lower unemployment number. Whilst this may be the case, it is worth pointing out that real wages growth remains benign.

Even with the budget’s strategy to push unemployment below 5%, the lack of real wage growth and a complete disregard for underemployment levels means that these forecasts could be irrelevant. The past year has seen significant changes in people’s behaviour towards work, travel, spending and saving.

It is no surprise that the savings rate for the average worker is hovering around 12% currently, compared to almost zero before COVID-19. As humans we tend to save in times of uncertainty and the past year has been very uncertain. There is a big pile of cash sitting in bank accounts and with the international borders remaining closed for the immediate foreseeable future, the idea that consumers will start spending to save the economy appears naive.

Inflation Blips

There is a furious debate amongst policymakers on one side and market economists on the other, about the state of inflation, particularly with the unexpected reading of 4.20% in the US last month. According to the Fed, this is merely a blimp and it will simply wash through the system with no lasting effects. On the other side of the argument, the last time inflation appeared so quickly was back in the 1970s when oil prices soared.

It appears the Fed is going to continue with an accommodating monetary policy, when they should be trying to push inflation down at the earliest opportunity. A policy failure by the Fed would have disastrous consequences for the markets, especially bonds.

One of the key indicators of the global economy is the rapid price rises of the Baltic Dry Index (BDI). The BDI is a composite of the Capesize, Panamax and Supramax Timecharter Averages. It is reported around the world as a proxy for dry bulk shipping stocks as well as a general shipping market bellwether. Basically, how much it costs to hire a big ship for the day.

Since the low at US$500 in the middle of the lockdown in 2020, the BDI has rallied sharply this year to just over US3,000 per day. Copper is trading at a record high. Corn, Soybeans and Coffee are at multi-year highs. Many other commodities are 3 to 4 times higher than a year ago. Around the world, countries are reporting a lack of skilled labour.

These inflationary forces are not short term. Covid-19 has ensured that governments have spent massive amounts of money supporting workers to stay at home. There is a shortage of labour and basic food supplies on the horizon. If inflation is entrenched, the result will be devastating for the bond market and people who are over-leveraged, as inflation is accompanied by rising interest rates.

These inflation readings have caused uncertainty amongst market commentators. The main reason for this uncertainty is that some important economic relationships, long taken for granted, such as the links between liquidity, inflation, employment and wage inflation, seem to have broken down to some extent.

If the models that the Treasury department use are out of date or worse, broken, then the budget forecasts are redundant. This would be compounded by the sustained restrictions on immigration and visa workers and we may see a situation where the budget is spending large amounts of money on the premise that more jobs lead to higher tax receipts. A failure to generate these jobs and reduce underemployment would result in an increase in our debt position.

BDI Chart

PPK Group Update

PPK continues to strengthen its investment story with another breakthrough development involving its subsidiary Li-S Energy and the efficiency improvements in battery-powered devices through BNNT. This development has significant global implications for energy storage and PPK. Stay tuned……… Read the article here