Market Strategist
Summary: The sleeping giant, iron ore, just woke up, flagging a technical bull run could potentially start and may take iron ore, Australias biggest export, out of a bear market and push up the Aussie share market. Iron ore has been trading 52% lower than its highs since May, keeping mining shares depressed, and for the first time in five months, overnight, iron ore broke and held above its 50 day moving average for the first time after rising 6.5% on new favourable China monetary policy. Here are the three elements you need to watch today in markets.
Firstly - iron ore, the sleeping giant
Iron ore crossing its 50 DMA implies trading momentum is likely to continue and push iron ore higher, and likely the ASX’s most valued company, BHP, as well as Rio Tinto and Fortescue Metals, as prospects for Chinese iron ore demand are likely to continue to grow amid favorable China policy. All else being equal, this could help the Aussie share market finally head back toward its all-time high (which the ASX200 is 4% from), while it could also strengthen Australia’s trade balance and AUD. It all comes also comes at good time for Australia; when QLD reopened its boarder, WA opens its on Feb 5 and Australia will soon have Moderna making mRNA vaccines in Melbourne. This is why the technical indicators are currently looking favourable (The MACD and RSI), implying iron ore stocks, financials and thus the broad Aussie market could continue to rally with buying mounting.
However, there are two absolutely huge caveats to seeing the Aussie market gain serious strength here, 1- we’re awaiting to see how virulent Omicron is. Overnight US equities fell from their record highs on Monday, down 1% as UK reported its first Omicron death which dragged the oil price down 1%) and 2- We are awaiting the Fed’s announcement on removing covid stimulus.
The market cold likely stay in a 5% range until the Fed tables when tapering (bond buying) stops and when it will rise official interest rates. Be mindful that bond buying could double from $15 per month to $30 billion, and possibly end March 2022 (instead of mid-year), sending up bond yields and making stocks that carrying more debt (tech and small growth stocks less attractive).
After stopping bond purchases, the Fed will have wiggle room to rise official interest rates from April onwards (potentially rising official interest a total of three times in 2022)… to cool the economy, slow spending, property price growth and of course inflation, which is back at 1980 highs. Don’t forget the Fed also wants to take the wind out of sails of stock market. Rising rates will take further heat out of growth stocks (especially those that operate on high price to earning ratios).
With this in mind, we are watching; 1- the CBOE Volatility index, which has picked back, rising above its 30-day moving average, after recently falling from its 12-month high, and 2; the EURUSD. If the Fed is more hawkish than anticipated at this Wednesday’s meeting, could see new highs in Fed rate expectations drive EURUSD to new lows below the November low, just south of 1.1200.
Secondly, watch companies with Australian analyst rating changes
Thirdly - what else to watch today; company and economic news
Companies in the news:
Economic news to watch today
Markets - the numbers
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