The Delicate Game of Interest Rates & Inflation

Brazil lifts interest rates by 1% to 5.25%. It’s seen as its most aggressive move since 2016.

2 weeks ago, Russia, (another commodity reliant economy) hiked rates too.

It looks like both central banks are trying to curb inflationary pressures. Rising commodity prices are a notable contributor.

Invariably, rising inflation will send government bond yields higher.

Why are the central banks in other commodity sensitive economies such as Australia and Canada still holding interest rates around the 0.50% mark?

Are the Bank of Canada and the Reserve Bank of Australia foolishly towing the same line as other Western economies?

The British, German and French economies are vastly different.

This may turn out to be a perilous policy error.

Are the BOC and RBA not entirely politically independent?

Can it be that the Russian Central Bank is acting for the good of the economy and citizens or is it because Putin doesn’t need to worry about being re-elected and Scott Morrison does?

Or perhaps it’s because the Household Debt to GDP for Russian’s and Brazilians is 22% and 37% respectively,

while in Canada it’s 113% and Australia’s is a world topping 123% ????

August 6, 2021

by Rob Zdravevski

rob@karriasset.com.au

Russia aggressively hikes interest rates

I found this news interesting.

https://www.reuters.com/business/finance/russia-raises-key-rate-65-sharpest-move-since-2014-2021-07-23/


Is the world’s 11th largest economy ahead of the curve and crowd when it comes to managing inflation or does its strengthening currency hinder growth and exports?

Incidentally, South Korea and Australia are ranked 12th and 13th

Westpac’s hitting resistance and holding support

Another price chart I am watching is that of Westpac Bank (WBC.AX).

I often post technical charting comments on Linkedin but my equity investing work always starts with identifying themes or trends and then moves onto fundamental mathematical analysis (balance sheets, income statements etc)…….

I use technical analysis to help with my price entry and exit as numbers and price charts make wonderful patterns which also assists with probability.

I am fundamentally bullish on banking stocks, however I have lightened some bank holdings as they recently reached historically overbought prices and fully valued valuations.

In Westpac’s case, it was a prudent thing to do. After all, the stock rose 57% from $16.50 (my buy price) to $26 within 10 months.

The high was $27.12.

It’s currently $25.60.

The share price capitalised what I thought was more than 2 years worth of earnings. So at that price (in June 2021) I asked myself do I want to pay this price (buy the stock) which is already factoring in 2024’s earnings?

From here, I think Westpac’s price trades below $24.50 (breaking that lower trend line) and makes a visit to $22.30.

Buying it 13% cheaper would be nice.

p.s. that line floating through chart is the 100 week moving average.

I’ll review this picture in late July/early August.

* this is not advice, just personal commentary.

July 2, 2021

by Rob Zdravevski

rob@karriasset.com.au

As goes Oil, so does the AUD

And as a follow up to the previous Brent Crude oil post,

the chart below may tell us what happens to the Australian Dollar compared to the U.S. Dollar…..

should Brent Crude decline

June 28, 2021

by Rob Zdravevski

rob@karriasset.com.au

Bullish on Aussie Banks

After 5 years, I have now become bullish on Australian banks.

For example, Westpac Bank’s 2021 forecasts have it trading below 1x book value, on a P/E of 11 and the dividend yield should be 5%, not including the franking credits.

Furthermore, I think its net interest margins will increase (as longer dates interest rates rise) and all of their bad news and fines are no longer “new news”, Westpac’s stock price also has traded at monumentally oversold readings…….not on a daily nor weekly basis, but on a Monthly reading.

See the chart below and you’ll see it’s only happened twice in 27 years.

October 19, 2020
by Rob Zdravevski
rob@karriasset.com.au

Political Trade Destruction

Dear Australian #auspol politicians involved in incompetent trade and diplomatic rhetoric……it is in the “Chinese” tea leaves, that Iron Ore is next on the list of ‘sanctions’. I just wish the media would call them sanctions. It would sell so much more advertising…..

Politicians who are inexperienced in business and unable reading the geopolitical mood are causing more damage than their pea brains can possibly imagine.

Don’t they understand that a backbencher from an obscure political seat calling for an “inquiry into the origins of a Chinese flu” is a badly weighted bet and ramifications of the rebuttal can hardy be comprehended by someone inadequately positioned to speak in a manner within a nation’s parliament.

In these circumstances, political table-pounding seldom prevails over commercial reality and necessity.

Don’t look know, but to the complacent producers of current and future ‘sanctioned’ products, our politicians are doing some effective price mean reversion on behalf of your wallet.

October 13, 2020
by Rob Zdravevski
rob@karriasset.com.au

First day of September wipes out August

Below is a continuing chart I’ve been posting for a while to disprove the illusion that the Aussie equity market is NOT screaming to new highs.

For the past 3 months, the ASX 200 has been trading sideways and today’s headlines from the Australian Financial Review following todays close of business was…..

“ASX wipes out most of August gains in single session.
The S&P/ASX 200 dropped 1.8 per cent on the first day of September, falling back to where it traded on August 3”

It’s a bit sad that the first day of September’s trading erased the WHOLE month of August’s efforts.

In fact, the ASX 200 is trading back to where it was on June 3rd, 2020.

The age of the stock picker is back….

September 1, 2020
by Rob Zdravevski
rob@karriasset.com.auASX 200 sideways

AUD – now Overbought at a Weekly Extreme

I feel markets are at another acute point.
It’s not about doom but rather to position for the opportunity.

In this note, I’ll start with the AUD and USD.

Since Buying AUD in the depths of March 2020, I’ve been advising clients to sell AUD against the USD in a tiered fashion at 0.66, 0.69 and 0.71.

With a weaker USD, we have also seen a commensurate advance in commodity prices. Note the link ?

I’ve been banging on about overbought readings recently each time they were registered on the “daily” charts, BUT now, significantly, we are seeing “Weekly” extremes.

Please take a look at the AUD/USD chart below and my annotations within it.

It’s only the 10th time in past 18 years that we have seen this and it’s the first time in 9 years.

I’m not calling a crash and of course and 0.7750 is entirely possible but I want to identify that such extremes are not common. Buying AUD at this end of the pendulums arc warrants thought to the probability of mean reversion.

September 1, 2020
by Rob Zdravevski
rob@karriasset.com.auAUD Weekly

Looking for a 15% decline in ASX 200

Today, the ASX 200 closed at 6002.

I am watching if the index will trade lower to “fill” the following “gap-ups”,

5918, 5803, 5604, 5394, 5055 & 4701.

Those are declines of 1.4%, 3.3%, 6.6%, 10.1%, 15.8% & 21.7% respectively.

I’m betting on it trading closer to the 5,055 level.

20 July, 2020
by Rob Zdravevski
rob@karriasset.com.au

Iron Ore – As Good As It Gets

June 23, 2020

by Rob Zdravevski
Iron Ore – As Good As It Gets ?

Over the past 6 weeks, the price of 62% grade Iron Ore has risen 25%. It’s now trading around $102.

Prices have risen due to a combination of China’s factories and manufacturing returning to a “normalised” utilisation and Brazil shipping less ore.

The previous spike, in January 2019, saw Iron Ore price climb from $75 to $95 within 2 weeks and a subsequent surge to $125 occurred over the next 3 months.

This was mainly due to the collapse of a tailings dam in Brumadinho (owned by VALE), which also tragically resulted in lives being lost.

I can’t quite reason about the cause of the 2nd lurch higher as economies were at the tail-end of a 7-8 year economic cycle.

However, the price normalised back to over the next 4 months as Australian suppliers filled the gap.

<see chart below>

Today, the price of Iron Ore has risen again due to a Brazilian supply disruption aided by “newer news” that Brazil’s COVID-19 environment is worsening.

Once again, Australian iron ore miners seized the supply opportunity yet prices have continued to roar ahead.

It is at this point in time, that I now think, that this is as “good as it gets” for the Iron Ore price.

But I also have the following questions;

  • Can Brazil contractually sell Iron Ore to China below prices as seen in the spot and futures markets?
  • Is it true that Brazil produces a higher grade of Iron Ore than Australia?
  • Will Brazil’s cheaper labour and production give them an advantage?

If the answer to these 3 questions is “Yes”, they then qualify for two of the three “cheaper, better and faster” categories.

Brazil could also be “faster” getting ore to the port, although overall we need to keep in mind that it does take 45 days to ship Brazilian Iron Ore to China when compared to the 12 day journey for Australian suppliers.

Anecdotally, I can’t help speculate that Brazil is feeling the strain of lower export receipts and may start to push product through its ports with less hesitation.

Inversely, it’s naive to think that China’s importers are submissive “price-takers” of sensitively priced commodities.

And so, my analysis of the price action in the Singapore traded 62% TSI contract suggests the strength of the advance is waning, as it makes a “rounding top” of lower highs and lower lows, a change in trend is near and the price traded to extremes on various measures.

The “fat part of the trade” has been seen and I expect it to retrace and trade down to $92.

For those who disagree, I am curious what you think will “drive” the price higher from here and how much risk are you taken when compared to the reward on offer when looking at the whole picture?
Until next time,

Rob
Subscribe to my blog: www.robzdravevski.com

Drop me an email: rob@karriasset.com.au

Disclaimer

 

Some extra reading.

https://www.abc.net.au/news/2019-02-12/iron-ore-price-explainer-after-mining-dam-collapse/10800698?nw=0

https://en.wikipedia.org/wiki/Brumadinho_dam_disaster

If you’d like to have a chat to me about some of our best stock ideas for your portfolio, feel free to call me on 0438 921 403.

Rob Zdravevski is the proprietor of Karri Asset Advisors, a specialist in the provision of investment advice and equity recommendations for clients’ portfolios.

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