Inflation Is a dollar today worth more or less than a dollar tomorrow?
Australian Inflation Numbers - What It Means for the Australian Dollar
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Transcript of Australian Inflation Numbers - What It Means for the Australian Dollar
Invast Insights
Week Commencing January 28, 2014
www.invast.com.au | 1800 468 278
This week we look at the following topics:
1.0 Hollywood films and market performance
2.0 Australian inflation numbers boost A$
3.0 ETF performance post currency moves
4.0 Gold price review – latest technical update
5.0 Weekly live market analysis sessions
www.invast.com.au | 1800 468 278
www.invast.com.au | 1800 468 278
1.0 Hollywood films and market performance
Most of the content in this week’s publication is based on financial analysis –
numbers, charts, statistics and economic data. We thought we would start this
first section differently. Over the past week we were drawn to a very
interesting image through social media that plotted recent Hollywood
produced films around stockbroking and how they compared with stock
market performance. The Wolf of Wall Street has just been released in
Australia and there is no doubt of some strong interest out there among
trader to go and watch.
Anecdotes are at times important to take into consideration. The market is
made up of hundreds and thousands of individuals, usually a crowd mentality
develops and this drives investment trends. Films are a great way into what
the herd is thinking – when everybody is bullish and pumped up about the
market you can see this play out through your film or television screens.
Producers won’t fund a feature film unless they know it will resonate at the
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box office. When the property market is hot you see all types of auction
shows, renovation programs and experts on TV giving you their guide. When
the stock market is hot, everybody wants to be a broker or at least watch
content that glorifies them.
We don’t really care about the film, we won’t be reviewing it or making a
judgement. The jury is still split among the Invast office in Sydney as to who is
watching it. The point here is that the film itself is merely all entertainment.
What we will do though is point out the image mentioned and how the
market usually performs when such feature movies are released. The last such
film to hit screens was Wall Street where Michael Douglas made a return to
play out his sequel to his famous 1980s Gordon Gekko performance.
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Image: Hollywood films on stockbroking vs. S&P500 index performance via @bondvigilanted
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The chart above is not perfect, for example the second version of the Wall
Street film was actually released in 2010 at the bottom of the market. There
was a huge rally that came following this. The image points to the year in
which the film was filmed, so this isn’t exactly a compelling chart. It is though
and interesting way to look at the market, a different way. We are sure some
of you even chuckled when you saw the image above. We dedicated half of
this report on this image because we want you to have this in the back of
your mind when you hear your friends or family members mention the film.
Perhaps the market will continue rising, we have made clear our thoughts on
key stock markets in our recently released 2014 Forecast Guide, but when
everybody starts jumping on the band wagon you know it’s time to be
cautious.
We wouldn’t be surprised to see major US indices continuing to fall over the
next few weeks, there is perhaps the prospect of a pullback in the order of 5-
10%. US reporting season is underway and ramps up this week. So far as of
the time of writing around 10% of S&P500 companies had reported earnings.
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Only 50% of these actually beat expectations which are below the September
level. The long term beat rate average is somewhere in the order of around
65%. Some 37% actually missed estimates. We will provide a more detailed
analysis on the actual performance of earnings next week. We spoke about
the unusually high level of earnings beating expectations the last time US
earnings were reported. It seems as though this anomaly is now starting to
revert back towards the long term average. A pullback in US markets is not
necessarily bad news but instead provides more sustainability.
2.0 Australian inflation numbers boost A$
The ‘trimmed mean’ is the key number we watch and the 0.9% quarterly
increase was much higher than anticipated. We were calling for a number of
around 0.6%, the market was close to that, some bulls were at 0.7% and so
the 0.9% final print should be read in that context. This inflation reading does
not completely put a lid on further interest rate cuts but it removes the
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immediacy – perhaps pushing any chance into the second quarter of this
calendar year. We now don’t see a rate cut in February or March.
For most of the past twelve months, inflation has been a secondary
consideration for the RBA. The rise in the A$ against other currencies had
helped contain imported inflation. As the currency falls, this will reverse. We
might be seeing the first signs of this now flowing through. Inflation is still a
secondary consideration but the RBA will find it very difficult to brush this
reading off. Unless we see a 6% unemployment rate, the RBA is unlikely to cut
further. Another high quarterly inflation number this year will see the RBA
change its tone.
Bottom line: Aussie dollar shorts were completely squeezed out by the
announcement. The AUDUSD spiked by 50-60 points on the release and it
seems as though the 0.8775-0.8820 range has now broken. We think the
AUDUSD can continue to rise to around the 0.9000 range before it starts to
meet new resistance. Has the Aussie dollar turned a corner? Perhaps for the
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short term! Many traders will think twice about further selling after
completely digesting this inflation read, but then again, the vulnerabilities
around the Australian economy have not completely been addressed and last
week’s worse than expected jobs number cannot be discarded either.
Our focus is now on February reporting season to see what the corporate
world thinks of the economic situation. Consumer sentiment is still declining.
www.invast.com.au | 1800 468 278
www.invast.com.au | 1800 468 278
3.0 ETF performance post currency moves
Exchange Traded Funds (ETFs) were one of the main beneficiaries as the
Australian dollar fell over the past few months. Our Wealth Preservation
portfolio also has two ETF exposures, one in the Japanese market through the
IJP and the other on the Australian market via the STW code. These products
have become popular as investors look at expanding the geographical
diversification in their portfolio. There is also the attractiveness of adding such
a large exposure of companies through one single trade. For example the IJP
provides exposure to around 300 of the largest Japanese companies – most of
them beneficiaries of Abe’s quantitative easing policies – through one single
trade. In out prior report we wrote the following “The other thing to consider
about Australian listed international ETFs is that most of them are unhedged.
You are effectively paying an Australian dollar dominated price but for a pool
of investments that are dominated in another currency.
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So if the Australian dollar rises against the Japanese yen for example, the IJP
will see adverse movements all other things being equal. There is an
opportunity to hedge out your currency risk with Invast’s other foreign
exchange trading products and so this risk can be minimised. The time might
also be ripe for expanding offshore exposure given the strength of the
Australian dollar in recent years. If you are of the view that the Australian
dollar will fall back to say 80 US cents in three of five years, the option is there
to exchange those Australian dollars into other currencies via ETF products
where appropriate”
Below is the six month performance of ETF securities listed on the ASX and
issued by iShares. Invast does not issue any ETF products, we merely just
report on what is already offered on the market. These instruments are not
built or monitored by us, rather by iShares which is part of the Blackrock
group. You should always check the appropriateness of the product for
yourself and read the disclaimers which the issuer makes available through
their excellent website – au.ishares.com. There are other listed international
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on the Australian market but we have stuck to those listed by iShares for
illustrative purposes. While global stock markets have remained relatively flat,
the fall in the Australian dollar has helped fuel an increase in Australian listed
ETF performance.
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Image: International ETF securities issued by iShares listed on the ASX as of 23.01.14
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The next six months might show a reversal in this positive currency move for
Australian investors. We’re still bullish on European markets but think it might
be more prudent to take a direct index position on the DAX for example and
hedge the currency exposure to ensure any appreciation in the Australian
dollar against the Euro does not diminish investment returns. ETF currency
exposure has worked out well over the past six months but the time is right
to change course and reconsider, particularly for those investors who
managed to benefit from recent moves.
The STW remains one of the best ways to get diversification into your
portfolio. We will continue holding this through our Wealth Preservation
portfolio. It provides exposure to the ASX200 index through one single, easy
to manage trade. Management costs are very competitive at 0.29% on an
annualised basis. The instrument isn’t issued by iShares, instead by State
Street Global Advisors, and so it doesn’t appear on the list above.
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4.0 Gold price review – latest technical update
Watch full video here: http://www.youtube.com/watch?v=VRaCBaFyY2Q
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There has been a lot of interest among clients over the past couple of weeks
on the gold price. We last updated our technical outlook right before
Christmas and also in our 2014 Forecast Guide. We published a video late last
week with key levels, you can watch the video by clicking the image to the
left. There are some very solid technical levels to keep an eye out for, if you
are trading gold make sure you keep these in mind.
Key points are:
• Key trend line resistance on the daily timeframe remains in play. This was
set since August 2013. Gold has been rejected in the Ichimoku cloud
resistance level.
• This creates two key rejections which is significant.
• In addition to this, a previous key support level has turned into a
resistance level. We see this at US$1265/oz. There was support here in late
December 2013. This creates three rejection indicators.
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• Sellers are taking on this new price reality now. Gold is likely to trade
lower. The stochastic oscillator created a higher high but this wasn’t
replicated on the chart.
• The way to trade this is as follows – Short gold at current price levels as of
the time of writing at around US$1235/oz with a key initial target at
US$1180/oz. Then next targets are in at US$1133-1160/oz over the next two
to three weeks. Stop loss at US$1265/oz.
• We see the Risk reward ratio as attractive – twice as much the amount of
potential reward relative to the risk if the above targets are implemented.
Please make sure you enforce the stop loss level if you want to follow this
strategy.
www.invast.com.au | 1800 468 278
5.0 Weekly live market analysis sessions
So what happens if the above technical analysis is out dated by the time you
read this report? Rest assured, we have thought of this. Invast is currently
running weekly live market analysis sessions in where we update all the
market action on Wednesday evenings (Australian EST) and take your
questions and answers. This is a great service which allows you to stay up to
date and ask our analyst team to help guide your trading progress. You also
have the opportunity to ask questions directly from Invast’s analyst team – a
fantastic opportunity to hear thoughts direct from the desk.
We received a great question last week from a trader who asked which
timeframe was the right one to use when trading a certain currency position.
While Invast Insights comes out each Monday, the Wednesday session is a
great opportunity to touch base between market movements. The sessions
are designed to touch on two key currency trading opportunities, we
highlight two major global indices like the Dow Jones or the DAX and then
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we often mention about one key commodity – gold, oil or another
comparable. You can always send through any specific queries you have to
our Senior Technical Strategist Vito Henjoto by emailing
[email protected]. We encourage you to get involved in these sessions
and register online by visiting the webinar registration section of our website.
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7.0 Disclaimer
Please note that you are receiving this report complimentary from Invast Financial Services Pty Ltd (AFSL 438 283). Invast staff members may from time to time purchase securities which are included in this or future reports. The authors of this report may or may not be holding a position in the securities mentioned. Please note that the information contained in this report and Invast's website is of a general nature only, and does not take into account your personal circumstances, financial situation or needs. You are strongly recommended to seek professional advice before opening an account with us.
General Disclaimer: This newsletter contains confidential information and is intended only for the person who downloaded it. You should not disseminate, distribute or copy this newsletter. Invast does not accept liability for any errors or omissions in the contents of this newsletter which arise as a result of downloading this newsletter. This newsletter is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell any financial product. Invast Financial Services Pty Ltd is regulated by ASIC (AFSL 438 283 | ABN 48 162 400 035).
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Risk Warning: It's important for you to read and consider the relevant Product
Disclosure Statement, and any other relevant Invast Financial Services Pty Ltd
documents before you decide whether or not to acquire any financial
products listed in this email. Our Financial Services Guide contains details of
our fees and charges. All these documents are available here on our website,
or you can call us on +612 8036 7555. CFDs and Foreign Exchange are
leveraged products and carry a high level of risk and you can lose more than
your initial deposit so you should ensure CFD and Foreign Exchange trading
meets your personal circumstances.
General Advice Warning: Being general advice, this newsletter does not take
account of your objectives, financial situation or needs. Before acting on this
general advice you should therefore consider the appropriateness of the
advice having regard to your situation. We recommend you obtain financial,
legal and taxation advice before making any financial investment decision.
*Distributed with the permission of Invast.com.au