ETF UPDATE: Aussie Dollar Pointing Lower

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Since early January, the AUD/USD  has traded in a 250 point range between .7500 and .7750.

Now that the FED has raised rates this year (and has given guidance for more tightening) the yield differential between the overnight rates between Australia and the USA has narrowed to just 50 basis points.

This compares to 200 basis points this time last year.

In addition, with domestic employment growth sputtering and lower inflation readings, the RBA has maintained an easing bias for overnight rates in Australia.

This strengthens the case for the AUD/USD to trade lower and return to the December lows of .7150.

Investors looking to profit from a falling AUD/USD have been buying the BetaShare YANK Exchange Traded Fund (ETF). The current unit price of YANK is $14.10.

We estimate that a move back to the December low of .7150 would increase the unit value of YANK to approximately $16.75.

ALGO Signal- Ansell

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The Algo engine generated a sell signal for Ansell at the close of trade yesterday.

From a technical perspective, Ansell’s closing price of just under $23.00 is very close to the 50% retracement  of the high of $25.65 traded on January 9th and the low price of $20.60 posted on February 20th.

While we still like the longer-term growth prospects of the company, we are seeing signs that the general market may be rotating lower over the medium term.

As such, we believe its reasonable to expect that investors will be able to buy Ansell back below the $22.00 handle.

The current price of $23.35 offers a good opportunity to sell close-to-the-money call options to enhance portfolio returns.

Heavy Losses On Wall Street

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Both the DOW Jones 30 and SP 500 index fell over 1% today during the worst trading session for 2017 for US Blue-Chip stocks.

Banking names led the hefty losses, with the DJ Banking Index trading back below the 50-day moving average.

Dow/SP component Goldman Sachs lost almost $10.00 on the day and is now 10% lower than the March 1st close of $253.00.

A confluence of lower loan growth, political uncertainty and extended valuations pressured the banks, as well as the general market, lower on very high trading volume.

Technically, both the DOW Jones and the SP 500 have posted their first close below the 30-day moving average since November 7th.

The unwinding of the overbought conditions in many of the index components will likely be a process more than an event.

With the banking sector very heavily weighted in the ASX 100, this process will likely pressure Australian names lower, as well.

Investors who are looking to hedge their portfolios or profit from a down move in the ASX can trade either the BetaShare  BBOZ  or BEAR Exchange Traded Funds.

These are inverse funds which gain value as the ASX index trade lower. Please call for more information.

Gold/Newcrest Break Higher

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As Wall Street stocks moved lower, gold prices continued to attract “safe haven” flows.

As mentioned in our earlier post, the yellow metal met technical resistance at the 30-day moving average price of $1230.00 last Friday.

However, with global equities correcting from recent highs, the next key resistance level will be the February 27th high of $1263.00.

Similarly, shares of Newcrest Mining have broken above the 30-day moving average and now look set to test the February 23rd high at $23.45

GOLD/Newcrest Approach Resistance Levels

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Both the share price of Newcrest Mining and Spot Gold rallied sharply last week.

As such, both are now trading against the key technical resistance at the 30-day moving average areas of $22.00 and $1230.00, respectfully.

Looking ahead, the question is whether the inverse correlation between global equity prices and Gold continues, and whether that will continue to lift the shares of Newcrest?

On Friday, the daily trading volume in Newcrest was 12.7 million shares.

This is more than twice the average daily turnover of 5.5 million and the largest volume day since 18.5 million shares were traded on June 24th, 2016.

Generally, an up-day in the share price, on expanding volume, is a positive sign for further gains in the share price.

At this point, we don’t have a buy signal from the ALGO engine but will watch the price action closely.

Chart – NCM

TABCORP Fined $45 Million

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Tabcorp has agreed to pay the largest civil penalty in Australian corporate history yesterday, as company officials admitted that they had failed in it’s obligation to strictly follow domestic Anti-money laundering laws.

The gaming company agreed to pay $45 million to the Federal Government and pledged to modify its protocol for management oversight and operational execution of their money laundering program.

We feel the “silver lining” to this story is that the ACCC will take a favorable view of Tabcorp’s admission of oversight and commitment to increasing internal surveillance when ruling on the pending merger with Tatts group.

Shares of the company have traded back to support at $4.50 in early trade. We view Tabcorp as a $5.00 stock in the medium-term and suggest adding to long positions at these levels.

FED Lifts Rates, Gives Cautious Guidance

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The US Federal Reserve raised the benchmark Fed Funds rate by 25 basis points to a range of .75% to 1%.

The FED’s “Dot Plot” Table of FED members’ projections for short-term interest rates showed three hikes in 2017, three in 2018 and three in 2019, which is unchanged from the prior forecast in December.

While the rate adjustment was expected, the unchanged forward guidance in the dot plots fell short of the street’s expectations. Many analysts’ were looking for a higher rate trajectory into the middle of 2018.

One reason given for the cautious outlook was the sharp fall in GDP growth for Q1 2017.

The Atlanta FED GDPNow tracker has been revised down to .9% from 1.9% in December.

ETF Watch: Resource Fund, QRE

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Since posting multi-year highs in mid-January, share prices for resource giants BHP and RIO  have pulled back over 10%.

Over the last week, both shares have traded in a “higher low” pattern which has triggered a buy signal from our proprietary Algo engine.

With general market pricing appearing to be at, or near, full value, we are cautious about buying these names outright.

However, Investors looking to capture gains in the Australian resource sector without having to pick one stock can buy the BetaShare Resource Exchange Traded Fund (ETF).

The code is QRE, it’s made up of 10 Australian resource companies and is current paying a yield of 3.9%.

Of the 10 companies that make up the fund, BHP, RIO and Woodside Petroleum  make up 52% of the weighting.

Contact us for more information on QRE, or the other ASX-based  ETFs we are currently following.

Chart – QRE (ETF)

Follow The FED Dot Plots

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The US Federal Reserve will make their decision on interest rates this Thursday at 5 am, Sydney time.

An adjustment of 25 basis point to 1% for the Fed Funds target is now priced into the market.

As such, equity investors will be focused on the forward guidance about the pace and trajectory of US rates  into 2018, and beyond.

This forward guidance will come in form of the FED’s “Dot Plots.” The dot plots are essentially a graphic reflection of where the FED members believe interest rates will be trading out until the year 2020.

For most equity investors, the key data will be how many rate hikes are expected to occur in 2017. When the FED raised the FED Funds target in December, the dot plots showed a consensus of three rates hikes during 2017.

The risk to the  US equity market is that the FED dots plots are revised higher to include an additional rate hike for 2017.

If that’s the case, it’s reasonable to expect US stock indexes to trade lower, the USD to trade higher and US Treasury yields to continue to firm.

Chart – Dow Jones

Aussie Dollar Update

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Since posting a high trade of .7740 on February 23rd, the AUD/USD  has dropped over 250 points , or 3.2%.

A corrective bounce into the weekend sees the Aussie currently trading back near .7540, but the technical chart structure looks weak and momentum indicators are point lower.

In addition, The US Federal Reserve is a near certainty to raise the Fed Funds target  this Wednesday.

This policy move will lift the Fed Funds target to 1%, and, (with Aussie overnight rates at 1.5%) will further narrow the overnight lending rate spread to just 50 basis points.

This fundamental shift will likely accelerate the repricing of the AUD/USD back into the .7300 handle.

Investors can profit from the AUD/USD moving lower with the BetaShare YANK Exchange Traded Fund (ETF).

YANK is an inverse, unit trust EFT with a weighing of approximately 2.5 to 1. This means that a 1% drop in the AUD/USD price will increase the value of the ETF units by approximately 2.5%.

Chart – YANK