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Market News, Stock Markets

Stock Markets: Global Trade Summit Could Change Investor Sentiment

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Stock Markets: Global Trade Summit Could Change Investor Sentiment

The first half of 2018 has proved to be an average year for DIA index compared to the first half of 2017.  DIA is down by 2.16% (YTD), while in 2017 it was up by 7% during the same period. It has a dividend yield of 1.86% and an annualized payout of $4.52.  The annualized growth in the last three years was 9.6% with a growth of 7% in 2017.

ASX 200
AUSTRALIAN ASX 200

The current half of 2018 has seen its own mix of political and economic upheavals thus bringing in serious volatility in all the exchanges around the world.  The events that caused headwinds were the historic meeting between President Donald Trump and President Kim Jong Un of North Korea and, the G-7 Summit. 

Macro factors continue to dominate the investment news headlines, and this is unlikely to change any time soon (as long as the trade war discussions are widely covered in the financial media).

How is global trade affecting performance in 2018?

The graph of DIA has been showing substantial ups and downs in the first half of 2018 due to the impending fears of a trade war and the federal interest rate hike.  

In mid-June, the stock tumbled down 1% on the wake of President Trump’s threat of imposing tariffs on $200 billion worth of Chinese products. The major stocks to be hit were Boeing (BA) and Caterpillar (CAT) which dropped by 4% each.  Goldman Sachs (GS) was up by 0.9%, 3M (MMM) was up by 0.6% and Home Depot, Inc (HD) was down by 0.3%.

Dow Jones Industrial Average
Dow Jones Industrial Average

The DIA index fell down from its 50-day moving average.  Compared with S&P 500, DIA has been seeing a downtrend mirroring the performance of Dow Industrials.  It is a signal that DIA would thus be weaker than SPY and S&P 500. The tariffs would come in force on July 6; however, its impact on the broader exchange market is yet to be seen.  In the meantime, the trade war continues between US, China, and the Eurozone markets.

Trends in stock market ETFs

DIA, like other ETF’s, showed a positive growth in June 2018 due to the recently released job data and falling unemployment rates.  The greatest shock to the Dow Jones Industrials was the removal of General Electric, the longs standing and continuous member since 1907.  

In the DIA, Boeing had a weight of 10% in the index, while General Electric was 0.35%. Wallgreens Boots Alliance Inc (WBA) entered as the replacement stock on June 26.  The removal of GE will have a big impact on thousands of investors who have holdings in the Dow Jones.

All in all, the stock market is now in precarious territory and investors in assets like the SPDR Dow Jones Industrial Average ETF will need to remain nimble (and attentive to economic data) in the weeks and months ahead.

Australian equities markets

After facing considerable plunges during February and March 2018, the shares of S&P/ASX 200 showed substantial volatility during the first six months of 2018 after settling down with a YTD growth of 2.2%.  The Index had shown a steady growth of 7% in October 2017 ($6,029) against the backdrop of the positivity brought by the announcement of the US tax cuts.  This growth remained steady till February 2, 2018 ($6,121), when the S&P/ASX 200 fell down 4.7% in the next two days.

The Index plunged by 5% or 300 points during the period from February 2 ($6,121) – February 12 ($5,820).  The stocks fell due to nasty selling by the investors due to the fear of an increase in the interest rates followed by the testimony from new Fed Chief Jerome Powell.

February 5 was the worst day for the index since June 2017 as prices fell 95 points or 1.6%.  This was primarily due to the release of the US jobs data. The wage data led to panic among investors that interest rate hike was likely too.  This uncertainty coupled with the inflation fears started the market rout on Wall Street which then affected other exchanges across the globe. The Australian dollar too touched an all-time two-month low.

Banking stocks

The stocks, however, rebounded back in the coming weeks by 4% after National Bank of Australia (ASX: NAB) posted an increase of 3% in the first quarter profits.  Following NAB was AMP Limited which posted an increase of 24% in its revenue, while Mirvac Group and AGL Energy both posting an increase of 8% and 7% in its half-year revenue.

In March 2018, the ASX 200 dropped another 5% (February 27 – March 29) due to the US-China trade war.  This heavily impacted the Wall Street and spiraled across Asia leading to a fall in the ASX 200 and All Ordinaries, with Banks and the Miners taking the biggest hit in this debacle.  However, the market gained momentum in April helped by the rising commodity prices and positive growth in the Energy (+10.7%) and Materials (+7.4%) sector.

From its all-time 2018 low of $5,751 on April 3, it shot up to $6,225 on June 22, an increase of 8.35%.  This was particularly due to key global events like the meeting of the President of the US and North Korea and the updates on the jobs growth in Australia and China.  June 15 was termed as the best day in the ASX, as All Ordinaries saw a growth of 1.2%, while ASX 200 grew by 1.3%.

Emerging Markets, Forex

China’s Move to Overthrow the Dollar: Will It Be a Success?

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China’s Move to Overthrow the Dollar: Will It Be a Success?

China is known as one of the fastest-growing major economies worldwide. Despite this, its currency is barely used in the global market, placing it just next to pound, euro, and yen. This year, the long-held desire of China to overthrow its competitors will likely get a boost.  Bitcoin helped crypto markets reach new highs, as well.

At present, China is considered to be the largest importer of oil in the world. Last October 2017, Russia sold an S-400 air defense system to Saudi Arabia and such move symbolized a big shift eastward for the Kingdom. China has managed to finally persuade KSA to accept its currency, Renminbi or RMB (also known as yuan in international contexts), as a payment for oil. As a result, China saw this success as an indicator of the increasing power of RMB and a stepping stone towards challenging the world’s most powerful currency, the dollar.

Pricing oil in its own currency

Aside from pricing one of the most important global commodities, China is aiming to overthrow the dollar to lessen its dependency to it, and to reduce its exposure to this currency as well as to its politics. In order to do this, China plans to further price oil in its own currency through a futures contract.

  • China has opened more than 6,000 new forex trading accounts for this contract. China will most likely rely on state-owned oil companies to use the new RMB forex trading contract. By doing so, the number of trade activities may increase and sufficient liquidity may be generated.
  • China will likely approach its major oil suppliers in different regions in Russia, Middle East, and other parts of Asia (those who have already accepted RMD as a payment for oil).

Predictions in 2018

Interestingly, a number of analysts believe in the possibility that China might become successful in this endeavor. Market acceptance may be somewhat cold at first but may turn better over time. When this happens (as the Chinese hope), the percentage presence of yuan in the currency reserve basket will greatly increase; thus, ensuring a runaway success.

  • On the other hand, many analysts think that it is still too early to think about RMB’s currency dominance. The hardest challenge in China’s goal is to ensure that no country or entity should have a dominant advantage over the others. The Chinese central government still play a huge role in the nation’s energy division sector, despite being it the fastest growing and largest consumer of energy in the world.
  • Some analysts believe that if China puts too much state control in the global oil market, things may occur in any other way. Such manipulation may also hinder the drive to create a reputable oil pricing benchmark that is capable of competing against more reputable benchmarks. Given this, many would most likely expect that a Chinese currency-dominated oil benchmark will only be working under China’s control.
  • Apparently, another major hindrance standing in the path of China’s goal is RMB itself. To date, RMB is not yet readily convertible and is prone to various interventions and capital manipulations, and favoritism toward Chinese business companies.
Forex, Market News

Stock Market Rallies Continue Setting New Records

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Stock Market Rallies Continue Setting New Records

  • Stock markets have resumed their rallies after the summer sluggishness.
  • The SPDR S&P 500 Trust could continue to benefit on multiple fronts.
  • Donald Trump’s pro-growth agenda could get another shot in the arm once his Federal Reserve selections are finalized.

Stocks are once again moving higher as markets have resumed their rallies after the summer period that was characterized by long periods of sluggishness.  In recent weeks, there has been a good deal of debate about whether or not the election of US President Donald Trump is what actually led to all of the gains that have been seen for those trading CFDs in the SPDR S&P 500 Trust (SPY).  Of course, a conclusive answer to those questions is all-but-impossible to achieve.  

But the strength of the rally, its historical proximity to the 2016 election results, and the supportive outlook that is generated by agenda pieces like tax reform and infrastructure rebuilding combine to suggest that investors are reacting Trump’s strategy course (and that those results are favorable).  In the weeks ahead, we could see additional impulse rallies in the SPY ETF if Donald Trump selects a Federal Reserve leader that is reluctant to aggressively rate interest rate levels.  This supports the outlook for CALL options strategies in the SPY at current levels.

S&P 500 - Stock Markets
S&P 500 – Stock Markets

On a year-to-date basis, the SPY ETF has posted gains of 15.3%.  Earnings have been largely supportive in many sectors but the real catalysts have been seen in the macro phenomena that have characterized the period.  On several occasions, the current Fed Chair Janet Yellen has made suggestions that broad uncertainties within the economy (and within the policy agenda pieces promoted by President Trump) have made it difficult to normalize interest rate policy in line with historical trends.  The ultimate result here has been cheap credit and improved consumer spending habits that have supported the outlook for corporate earnings into the final parts of this year.

Federal Reserve - Stock Markets
Federal Reserve – Stock Markets

So the real question here is whether or not these trends will continue within the financial environment, and the answer to that question could be seen near-term once Donald Trump makes clear which economist will be leading the Federal Reserve.  Of the likely possibilities, John Taylor has the strongest history of hawkish rhetoric so a selection here could catch markets by surprise and make rallies in the SPY ETF difficult as we head into the final parts of this year.  Janet Yellen has kept her foot on the brake on many occasions and it is now looking as though markets will need to see a continuance of this (in the selection of Jerome Powell) in order to keep this bullish train moving forward.

Microsoft - Stock Markets
Microsoft – Stock Markets

The second-largest holding in the SPY ETF is Microsoft Corp, which has been surging over the last several quarters as improvements in its cloud infrastructure have led to a series of strong earnings reports.  The stock makes up 2.75% of the total values seen in the ETF and given the strength of the recent earnings performances in the tech sector as a whole, rallies here could continue to be supportive of the larger fund collectives going forward.  In the monthly chart above, we can see that the bullish momentum here is undeniable and since the tech space is an area that is generally not as vulnerable to hawkish changes in interest rates, there is little reason to believe that these trends will be ending in the near-term.  

Readings in the Commodity Channel Index are bullish but holding at overbought levels, which is suggestive of a period of consolidation without a macro catalyst to drive prices higher.  This could come if a name like Jerome Powell is selected as Fed Chair, as the rising tide lifts all boats in the SPY fleet.  At this stage, there is very little reason to expect declines (barring a major surprise in the coming Fed appointments).  But with the SPY ETF still trading at record highs, the conservative bet is to use CALL options as a means for expressing that bullishness.