Weekly Wrap

Market Update

Calendar Icon   Friday, 2nd July 2021

ASX 200 Index (XJO)

The financial year of 20/21 was a stellar performance for the XJO, with the index recording a 23.2% gain for the year. Stocks within the banking sector have mostly recovered from the pandemic lows in March 2020. The Big 3 iron ore producers (BHP, Fortsecue and RIO) have made new highs as the demand for the red metal continues unabated. Technology stocks, such as Afterpay and Zip Co., peaked back in February when the market truly believed in the Buy Now Pay Later (BNPL) sector. These companies are yet to record a profit.

Crypto currencies have rocketed this year, alongside Non Fungible Tokens (NFT’s), with the main driver of these instruments being predominantly young, novice investors. Markets are always ready to hand out lessons and it would appear that a lesson is being learnt with the crypto universe being sold off aggressively in the past 3 months.

Australia was lauded as a beacon in how to handle the COVID-19 threat, but the lack of vaccinations this year is quickly forcing a rethink of that view. Lock downs are not good for the economy and if they continue there will be pressure to reintroduce programs like JobKeeper. However, with a projected debt of $1 trillion, the federal government is reluctant to dip into its pockets at this stage.

On a technical note, the XJO still has hasn’t broken out of the bar pattern set on 21st of June. A break of 7216 on the downside or 7368 on the upside is needed to determine the direction of the market for the next few weeks or months.

Market Snapshot

Volatility Index (VIX)

ASX Sector Movements

ASX Index Movements

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Quantitative Easing

A few weeks ago we explored the notion of Quantitative Easing and the effect it has on financial systems and the economy. There was an unusual situation in the Repo market, which is a mechanism the banks in America get overnight cash to square their books for the day. Normally, the banks will sell bonds to the US Federal reserve and pay to get cash back the next day.

With the Fed still buying US$120bn worth of bonds each month, the US financial system is awash with cash and the Reverse Repo, whereby banks deposit cash on the Fed’s account overnight, has grown to US$1 trillion. Banks have nowhere else to put the money.

Over the past 12 months the total commercial and industrial loans on bank balance sheets has declined from US$3 trillion to US$2.5 trillion, despite the supposed rebound in the US economy. Banks are reporting that there is no demand for credit and US consumers are sitting on US$2.3 trillion in savings.

The current monetary policy of the Fed has been compared to pushing on a string, which contributes to a slowing of the economy. Unfortunately for the Fed, any changes to their QE program will be seen as a failure as inflation rates are running at multi-decade highs.