Stress Is Building In the Inter-bank Lending Market

Posted on | by Todd | Leave a Comment on Stress Is Building In the Inter-bank Lending Market

While much of the financial media has been pointing to the threat of a trade war as the source of recent market volatility, we have also noticed rising stress in the inter-bank funding market.

As illustrated in the chart below, the LIBOR-OIS spread has spiked from 22 basis points to almost 60 basis points over the last 5 weeks.

The LIBOR-OIS spread reflects the amount of premium one bank requires from another bank to loan them money.

In simple terms, when banks start to question the financial health of other banks, the spread widens.

Rising funding costs are a headwind to global equity markets, which in turn acts to dampen bond yields; especially in the longer end of the curve.

The practical impact of this dynamic has been seen in the recent firming in some of the local interest sensitive names.

At these levels, we prefer the long side of SYD, TCL, SCG and WFD

LIBOR-OIS Spread

Sydney Airport

Transurban

Scentre Group

Westfields

ALGO Buy Signal For Bluescope Steel

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Our ALGO engine triggered a buy signal on Bluescope Steel into yesterday’s ASX close at $14.56.

The “higher low” price pattern is referenced to the $13.50 intra-day low posted on February 6th.

BSL reached an all-time high at $16.80 on March 2nd before falling over 14% to $14.40 on the threat of steel import tariffs from the USA.

We added BSL to our ASX Top 100 model portfolio on February 6th at $14.15.

BSL is currently trading at 12X 2018 earnings and we see the next upside resistance area near $15.85.

Bluescope Steel

 

Can Spot Gold Break Above $1370.00?

Posted on | by Todd | Leave a Comment on Can Spot Gold Break Above $1370.00?

Over the last 6-months, the price of Spot Gold has been capped just below the $1370.00 level three times.

With the current price around $1350, the question now is: will Gold be capped again, or will it break over $1370 and head higher?

Looking at Friday’s Commitment of Traders report offers an interesting perspective. The numbers show that the speculators are long and the commercial accounts are very short.

As a rule, since the commercial accounts actually hold the Gold, they are more likely to cover their short exposure quickly.

As such, we see a growing likelihood that Spot Gold will trade back over $1370 for the first time since July 2016, over the medium-term.

This extension of the recent rally will lift local mining names such as NCM, SBM, EVN and SAR.

Newcrest Mining

Santa Barbara

Evolution Mining

 

 

Aussie Dollar Points Lower On US Rate Divergence

Posted on | by Todd | Leave a Comment on Aussie Dollar Points Lower On US Rate Divergence

With the US FOMC raising its Fed Funds target from 1.5% to 1.75% last week, the overnight rate in the USA is higher than the benchmark rate in Australia for the first time in over 25 years.

This removes a key pillar of support for the AUD/USD. 

With the RBA firmly on hold throughout 2018 and the FOMC looking to lift rates at least 2 more times this year, we expect the downside pressure on the Aussie dollar to increase.

The AUD/USD posted a 3-month low of .7670 last week as internal momentum indicators continue to point lower. Current chart patterns suggest a test of the .7150 level over the medium-term.

Investors looking to profit from a lower AUD/USD can buy the BetaShare ETF with the symbol: YANK.

YANK is an inverse ETF, which means the price of YANK increases as the AUD/USD trades lower. It also has a weighting of 2.5%, which means the unit price will fluctuate  by 2.5% for every 1% change in the AUD/USD exchange rate.

With a current price of $13.40, we calculate that the price of YANK will be near $16.50 as the AUD/USD returns to the January 2017 low of .7160.

BetaShare ETF: YANK

 

ALGO Buy Signal For Medibank Private

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Our ALGO engine triggered a buy signal for MPL into the ASX close at $2.97.

This “higher low” structure is referenced to the August 23rd low trade of $2.66.

The half-yearly results released on February 16th were mixed: net profits grew by 6% but net investment income was 15% lower at $69 million.

As such, we would consider MPL a buy/write opportunity when the share price rises back into the $3.10 area.

MPL will pay a 6.75 cent dividend on September 28th, which puts it on a 4.4% annual yield at current prices.

Medi-Bank Private