We have highlighted some key market charts we are keeping an eye on. The charts can be a snapshot of the broader financial markets reflecting current economic and financial conditions.
Exchange Rate Chart – AUD Cross Rates
Exchange rates can be an useful indicator overall health of the economy. The key currency we keep an eye on the Australian dollar verses the US dollar (AUD/USD). The US dollar trend can have a major impact on the domestic income of miners where key export commodities like gold, iron ore and coal are all priced in USD.
We have a bullish view on the Australian dollar due to the weak currency supporting local employment in manufacturing and service exports. It acts as a stabilization mechanism in cushioning the economy by supporting export sectors like tourism and education which offsets a portion of the decline in the value commodity exports.
Similarly, the Japanese has appreciated against the USD and EUR due to the fading impact of the Abenomics.
Global Equity Market Snapshot
It can be useful in keeping an eye on the performance of equity markets around the globe. While there can be a high degree of equity market correlation during periods of market sell off. Not all bull markets are created equal.
The year to date return on the FTSE 100 can be misleading due to the effects of the currency. The pound has depreciated more than 10% against the US currency.
This means that while investors in UK equities are up year to date, it is still a negative return after taking into consideration movements in the exchange rate.
Inversely, the Japanese equity performance shows that a precipitous rise in the currency can be a headwind for equities. It is no secret that Japanese domestic economy has been in the doldrums for the last 2 decades but it is still a global export powerhouse. A rise in the Japanese yen is not helping future earning growth.
Sectors within the US Stock Market Chart
Chart below shows the individual sector performances within the S&P 500. It gives an indication on the flow of funds underneath the broader market. The strong return in interest rate sensitive sectors such as utilities and real estate, specifically Real Estate Investment Trusts reflect the low treasury yields. Current prices looks like the market has priced in no rate cut for the remainder of the year.
Conversely, the financials has been under performing the broader market due market expectation that low rates are here to stay.
Financials earns their income primarily through borrowing short and lending long. The collapse in the long term interest rate has depressed future earnings expectations for the banks. We consider the market as oversold for the financials where we disagree with consensus forecast that the current large number of negative yielding bonds will remain for a prolong period. This is driven by our bullish view on domestic US economic growth.