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ST note - Price action to watch

Junvum Kim

Sales Trader

Summary:  AUDUSD has touched and tested 70 cents again for the first time since Aug last year after it found bottom at 0.62 three months ago and ASX200 is worth watching as it has hit fresh breaking above 7,400 handle and it is approaching 7,600 that has been a key triple top resistance level that formed during Aug 21, Jan 22 and Apr 22.

Netflix (NFLX) kicks off earnings season for the FAANG stocks as usual despite its weighting of 0.4% on S&P500 being far from the rest of the mega cap stocks including Microsoft (MSFT) 5.3% or even Meta platforms (META) 0.9%.  This is despite 100% rally from its 52 weeks low of $162.71 that was recorded about 8 months ago and YTD return of 10.7% that is second best only behind Amazon (AMZN) 13.6% so far this year.  The focus would be on the new subscriber numbers with expectations are set at +4.5m (consensus low 3.7m and high 5m) with two thirds should come from US/Canada and APAC.  Its P/E – both trailing and forward - sitting at around 30 times is pretty much the same as Tesla (TSLA) yet its revenue growth is projected to be approximately half at ~10% for 2023 and 2024 so it is probably not that cheap also relative to the US treasury 10 year yield giving you 3.4% even after big 20bps drop last night on the safehaven bids on recession fears causing the yield curve (3 months vs 10 year) to invert down to -123bps that is the most extreme since the yield curve spread was -218bps in first quarter of 1981 that implied recession probability of 86.5% according to Probit Model (Current issues in economics and finance article June 1996 Volume 2 Number 7).

This morning one of the key commodity stock Alcoa (AA) – largest US aluminum producer - fell sharply lower in after hour trading on the back of weaker than expected shipments guidance flagging global inflation, subdued demand and soft economic outlook in China even though forward looking commodities such as aluminum, iron ore & copper prices have shown signs of bottoming out since beginning of 4Q last year in the anticipation of China reopening with continuous stimulus.  Credit spread – junk yield vs 10 year risk free – also shows similar price action as it looks to have topped at 600bps and since then it has been narrowing.

Headline CPI has shown cooling prices and Fed’s preferred measure, particularly core PCE is another key data to watch that is due 27 January with estimate at 4.4% YoY but according to the Taylor rule – that looks implies the Fed funds rate based on gaps of inflation and output – the current Fed rate of 4.3% is more than 300bps short despite narrowing the gap significantly from ~800bps about a year ago therefore the recent terminal rate of 4.8% (50bps further hikes) that is set from the futures market seems still way far from what it should be unless we witness more price stability and core PCE dropping towards 2% target.

AUDUSD has touched and tested 70 cents again for the first time since Aug last year after it found bottom at 0.62 three months ago and this coincides with Shanghai composite index (P/E 11) and CSI300 (P/E 12) – that exclude big tech names like Alibaba and Tencent – similarly rebounding 30% and 24% respectively.  Their P/E noticeably look cheaper compared to S&P500 (17.5 times) but little but more expensive against Hang seng’s 10 times.

Lastly ASX200 is worth watching as it has hit fresh breaking above 7,400 handle and it is approaching 7,600 that has been a key triple top resistance level that formed during Aug 21, Jan 22 and Apr 22.  Its YTD return of 5% has been mostly driven by cyclical stocks in consumer discretionary (9.3%) and materials (8.8%) however the index is lagging behind Hang seng and CSI300 with 9.6% and 6.7% respectively so as long as Aussie commodity stocks (¼ of the index) along with the financials (nearly 30% weighting) remain supported, ASX200 should do well and its dividend yield of 4.4% being the best out of the major equity indices as the big ex dividend approaching in the next two months with 100+ points worth among 121 stocks.

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