ASX 200 meets resistance as miners retreat

The ASX 300 Metals & Mining index breached its new support level at 3300, warning of a bull trap. Penetration of the rising trendline would test primary support at 3100.

ASX 300 Metals and Mining

The divergence between iron ore and miners was bound to end and a correction of the Metals & Mining index is now likely. Iron ore below support at $62 warns of a test of primary support at $53. Declining Twiggs Trend Index signals selling pressure.

Iron ore

The ASX 200 encountered resistance at 5900. Retracement is likely to test the new support level at 5800 (top of the narrow ‘line’ formed over the last four months). Twiggs Money Flow reversal below zero would be a bearish sign.

ASX 200

The ASX 300 Banks index are testing resistance at 8800. Respect of resistance would warn of another test of primary support at 8000.

ASX 300 Banks

If banks and miners both turn bearish, the index is likely to follow.

Australian growth faces headwinds but the index has other ideas

Bill Evans at Westpac sums up their outlook for the Australian economy:

….Constraints on growth next year are likely to centre on a lack lustre consumer who struggles under the weight of weak wages growth; high energy prices and excessive leverage. Conditions in housing markets, particularly in the eastern states, are likely to soften while the residential construction boom will turn down.

We are also less euphoric about growth prospects for our major trading partners than seems to be the current consensus. We expect China’s growth rate to slow from 6.7% to 6.2% as the authorities step up policies to slow its long running credit boom.

Yet the ASX 200 broke out of its line formed over the last 4 months, signaling a primary advance.

ASX 200

Miners are advancing, with the ASX 300 Metals & Mining Index breaking resistance at 3300.

ASX 300 Metals & Mining Index

The ASX 300 Banks Index is headed for a test of 8800. Upward breakout would complete a bullish outlook for the ASX 200.

ASX 300 Banks Index

Bank rally boosts the ASX

Banks rallied, with the ASX 300 Banks index breaking 8500 to signal another test of resistance at 8800. Breakout above 8800 would signal resumption of the primary up-trend but expect retracement to first test the new support level. I will remain wary of banks until the support level is respected.

ASX 300 Banks

The bank rally helped to lift the ASX 200 above resistance at 5800 — from the narrow ‘line’ formed over the last four months. Breakout signals another primary advance but again wait for retracement to respect the new support level. Respect would confirm a test of the 2015 high at 6000. Twiggs Money Flow peaks below zero still warn of long-term selling pressure. Reversal below 5800 would mean all bets are off.

ASX 200

On a more bearish note, iron ore is heading for a test of primary support at $53. Declining Twiggs Trend Index signals selling pressure. Breach of primary support would spell trouble for the miners.

Iron ore

The ASX 300 Metals & Mining index rally continues but another test of 3100 is likely. Breach of 3100 would most likely drag the ASX 200 (and banks) lower.

ASX 300 Metals and Mining

The truth about our debt

Stephen Koukoulas says Australians have little to worry about high household debt:

….According to the latest data complied by the RBA, household assets are growing very strongly, aided by a building up in savings, unrelenting growth in superannuation holdings, growth in bank deposits and of course, from rising house prices.

While household debt is indeed just under 200 per cent of disposable income, household holdings of financial assets, which includes superannuation, direct share holdings and deposits, is now over 400 per cent of income…..

….The total value of housing in Australia is …. over 500 per cent of disposable income.

…. for every $1 of debt that the house sectors has, they have $5 of assets, which is a loan to value ratio of 20 per cent.

…..while the asset side of the household balance sheet remains healthy, the debt side will remain a non-problem.

That’s the problem with averages, they conceal a multitude of sins. Many Australians own houses without a mortgage. Probably the same group own most of Australia’s financial assets. They are financially secure, no doubt, and help to make the averages look reasonable.

But there are vast numbers of Australians in the mortgage belt with low financial assets and high loan-to-value ratios (LVRs) on their household mortgage. Any rise in interest rates would cause them financial stress and the impact of this would flow through the entire economy.

From Elizabeth Tilley at the Courier Mail:

Almost 50,000 households are at risk of defaulting on their home loans in the next 12 months and nearly a third of homeowners are in mortgage stress, new figures show.

The latest mortgage stress and default modelling from Digital Finance Analytics for the month of September reveals more than 905,000 households are estimated to be in mortgage stress — 45,000 more than there were the month prior.

….Of those households, 18,000 are in severe stress, which means they are unable to meet home loan repayments with their current income.

Not quite as rosy as the averages may seem.

Source: The truth about our debt

Hat tip to Macrobusiness.

ASX 200 finds support

The ASX 200 found support on Friday after threatening to break support at 5650 earlier in the week. The narrow ‘line’ formed over the last four months continues. Twiggs Money Flow peaks below zero still warn of long-term selling pressure. Breach of support at 5650 remains likely and would signal a primary decline. Breach of support at 5650 would confirm.

ASX 200

Iron ore broke short-term support at $62, signaling a test of primary support at $53. Declining Twiggs Trend Index signals selling pressure.

Iron ore

Strangely, the ASX 300 Metals & Mining index rallied. Breakout above 3300 would confirm a primary up-trend.

ASX 300 Metals and Mining

The ASX 300 Banks index are a major drag on the ASX 200 broad market index. See Australian Banks Under Selling Pressure.

ASX 200 selling pressure continues

Iron ore found short-term support at $62 after a sharp fall. Declining Twiggs Trend Index signals selling pressure. Breach of $62 is likely and would warn of a test of the June 2017 low at $53.

Iron ore

Decline of ASX 300 Metals & Mining index similarly halted at 3100. Respect of 3000 would confirm the long-term up-trend.

ASX 300 Metals and Mining

The ASX 300 Banks index is consolidating below resistance at 8500. Respect of resistance would be a bearish sign, as would another Trend Index peak below zero. Breach of 8000 would signal a primary down-trend.

ASX 300 Banks

The ASX 200 continues to test support at 5650, in the narrow ‘line’ formed over the last four months. Trend Index peaks below zero warn of selling pressure. Breach of support at 5650 is likely and would signal a primary decline. But wait for breakout to confirm.

ASX 200

ASX 200 selling pressure as iron ore falls

Iron ore is falling in a sharp, typical bear market decline since it penetrated its rising trendline. A test of the June 2017 low at $53 is now likely.

Iron ore

The ASX 300 Metals & Mining index broke support at 3200 and looks set to test 3000. But respect of 3000 would confirm the long-term up-trend.

ASX 300 Metals and Mining

The ASX 200 continues to test support at 5650, in the narrow ‘line’ formed over the last four months. Twiggs Trend Index peaks below zero warn of selling pressure. Breach of support is likely and would signal a primary decline. Wait for confirmation from a breakout.

ASX 200

The ASX 300 Banks index is testing resistance at 8500 after a bear market rally. Respect would be a bearish sign and breach of 8000 would signal a primary down-trend. Recovery above 8800 is unlikely at present but would complete a double-bottom reversal.

ASX 300 Banks

Banks and Mining have so far counter-balanced each other, with miners rallying when banks fall and banks rallying when miners fall. Breakout of the ASX 200 from its narrow line is likely to occur when both banks and miners move in the same direction. Down is more likely at present.

ASX 200 selling pressure as iron ore corrects

Iron ore penetrated its rising trendline, signaling a correction. A trough that forms above the June 2017 low would be bullish for miners.

Iron ore

That seems likely given rising crude steel output in China.

China Output

The ASX 300 Metals & Mining index is testing support at 3200. Breach is likely and would signal a test of 3000. But respect of 3000 would confirm the long-term up-trend.

ASX 300 Metals and Mining

The ASX 300 Banks index rallied off support at 8000. Respect of resistance at 8500 would be a bearish sign and breach of 8000 would signal a primary down-trend. Recovery above 8800 is unlikely at present but would complete a double-bottom reversal.

ASX 300 Banks

The ASX 200 continues to consolidate in a narrow line between 5650 and 5800 but the tall shadow on this week’s candle and Twiggs Trend Index troughs below zero both warn of selling pressure. Breach of support would signal a primary decline, but direction remains uncertain until there is a clear breakout.

ASX 200

Australia: Economy needs more support

Low corporate bond spreads (BBB-Treasury) indicate the absence of financial stress.

Corporate Bond Spread

Australian wage growth is also low, but declining.

Wage Index

And shrinking currency growth suggests the economy needs even more support than the large recent spend on public infrastructure.

Currency Growth

Australia: What housing bubble?

Some interesting comments from economist Saul Eslake regarding the Australian housing bubble:

“Rising house prices are not of themselves a reason for the market to drop. About two thirds of Australia’s household debt is owned by the top 40 per cent of households, by income distribution. There hasn’t been a lot of lending to people on low incomes,” explains Eslake.

Lending to people on small salaries is one of the reasons housing markets in other countries, such as the US in the sub-prime crisis, have come under pressure in the past.

There has also been a decline in the home ownership rate in Australia that also reduced the chance of a housing bubble popping. According to the 2016 census, home ownership is the lowest it has been since the census of 1954…..

Australia also never experienced the same extent of low-doc lending as happened in the US prior to the financial crisis, where “ninja loans” – no income, no job, no assets – were commonplace.

Similarly, very high LVR lending, another problem in the US, did not occur to the same extent in this market.

“In the US people of surprisingly modest means could get loans valued in excess of 100 per cent of the value of the property. But in Australia it’s very difficult to get a mortgage at more than 80 per cent LVR without mortgage insurance,” says Eslake.

…..An excess supply of housing, which impacted the US and Irish markets, is also missing in Australia.

“In countries housing supply ran a long way ahead of underlying demand. Builders kept building in the expectation of future demand. When the cycle changed, forced sales and excess supply crashed the market,” says Eslake.

For the last 15 years Australia has had a housing shortage. While that’s changing given a record numbers of apartments have been built in the last few years, supply has not yet outstripped demand.

While he does mention risks attached to interest-only mortgages, Saul’s view is that “a correction in the domestic residential property market, at this point in the cycle it seems unlikely.”

I believe there are further assumptions that he has not mentioned:

  • That banks continue to provide credit at the same rate as they are at present. A slow-down in new credit, precipitated by rising interest rates or falling prices, could cause a contraction.
  • That the inflow of foreign investment into Australian residential housing continues at the same rate as at present. There are three possible headwinds:
    1. Reluctance on the part of Australian banks to increase exposure to foreign investors.
    2. Tighter monetary policy in China.
    3. And a Chinese crackdown to restrict capital outflows.
  • That current low interest rates continue. Inflationary pressures are low, so this is not unreasonable at present, but circumstances can change. So can LVRs.

I would describe the situation as reasonably stable at present but increasingly precarious in the long-term as the ratio of household debt to disposable income continues to climb.

Source: Opinion: What if the housing market crashed?

Australia: Housing bubbles and declining business investment

The Australian housing bubble is alive and kicking, with house prices growing at close to 10% per year.

House Prices

Loan approvals are climbing, especially for owner-occupiers. Fueled by record low interest rates.

Loan Approvals

Causing household debt to soar relative to disposable income.

Loan Approvals

Business Investment

Nominal GDP growth of 6.34% for the 2017 FY is a rough measure of the average return on capital investment.

Australia Nominal GDP

With a mean of close to 5% over the last two decades, it is little wonder that business investment is falling. Not only in mining-related engineering but in machinery and equipment.

Australia Business Investment

Capital Misallocation

More capital is being allocated to housing than to business investment.

Australia Credit Growth

Returns on housing are largely speculative, premised on further house price growth, and do little to boost GDP growth and productivity.

The result of soaring house prices and household debt is therefore lower business investment and lower GDP and wages growth.

Australia Wages Growth

You don’t have to be the sharpest tool in the shed to recognize that soaring household debt and shrinking wage growth is likely to end badly.

Banks drag ASX lower

The ASX 300 Banks index is headed for a test of support at 8000. Declining Twiggs Money Flow warns of selling pressure. Breach of 8000 would signal a primary down-trend.

ASX 300 Banks

The ASX 200 continues to consolidate in a narrow line between 5650 and 5800. The index is testing support at 5650 while Twiggs Money Flow warns of selling pressure. Breach of support would signal a primary decline, but direction remains uncertain until there is a clear breakout.

ASX 200

ASX miners surge

ASX 300 Metals & Mining broke through resistance at its January/February highs, signaling a primary advance.

ASX 300 Metals & Mining

But iron ore penetrated its rising trendline, suggesting that the rally is losing momentum. The next correction is likely to end above primary support (53). It may be prudent to wait for confirmation from iron ore before going all out on miners.

Iron Ore

The ASX 300 Banks index is headed in the opposite direction and continues to drag on the broad market index. Declining Twiggs Money Flow warns of selling pressure. Expect another test of primary support at 8000; breach would confirm a primary down-trend.

ASX 300 Banks

The ASX 200, pulled in both directions, continues to consolidate in a narrow line between 5650 and 5800. Rising Twiggs Money Flow (21-day) indicates short-term buying pressure and a test of resistance at 5800 is likely. Breakout from the narrow line will signal a primary advance or decline, but direction remains unclear despite the bullish movement from miners.

ASX 200

ASX Improves

The ASX 200 continues to consolidate in a narrow line between 5650 and 5800. Rising Twiggs Money Flow (21-day) warns of short-term buying pressure. Expect a test of resistance at 5800. Breakout would signal a primary advance, testing 6000, but breach of support at 5650 remains as likely and would warn of a primary down-trend.

ASX 200

The large cap ASX 50 is historically less volatile than its S&P 500 counter-part. While the Australian index has some smaller stocks (lowest-weight IPL has market cap of $5.7 bn compared to S&P 500 NWS of $10 bn in AUD) the higher dividend yield tends to compensate. That difference has reversed recently but Twiggs Volatility (21-day) for the ASX 50 is also falling, reaching 0.92% this week.

ASX 50 with Twiggs Volatility

Currency growth remains weak (below 5% per year), indicating that the economy still faces headwinds.

Australia: Currency Growth

Iron ore continues its extended bear market rally. The next correction is likely to find support above the primary level at 53.

Iron Ore

ASX 300 Metals & Mining is testing resistance at its January/February highs. Breakout above 3240 would signal a primary advance. Expect some profit-taking but reversal below primary support at 2730 is now unlikely.

ASX 300 Metals & Mining

The ASX 300 Banks index breached support at 8500, however, and continues to drag on the broad market index. Declining Twiggs Money Flow warns of selling pressure. Follow-through below 8400 would confirm another test of primary support at 8000.

ASX 300 Banks

ASX 200 Narrow Line

The ASX 200 continues to consolidate in a narrow line between 5650 and 5800. Declining Twiggs Money Flow warns of selling pressure and breach of support at 5650 would signal a primary down-trend. Follow-through below 5600 would confirm. Breakout above 5800 is unlikely but would test resistance at 6000.

ASX 200

Monthly hours worked are up 1.9% over the last 12 months. Marginally below real GDP but not something to be concerned about unless growth continues to fall.

Monthly Hours Worked - Seasonally Adjusted

Iron ore continues its extended bear market rally, suggesting that the next correction is likely to find support above the primary level at 53.

Iron Ore

ASX 300 Metals & Mining is also likely to find support above 2750. Respect of support at 3000 would signal a strong up-trend.

ASX 300 Metals & Mining

The ASX 300 Banks index continues to warn of selling pressure, with declining Twiggs Trend Index and Money Flow below zero. Breach of support at 8500 would signal another test of primary support at 8000.

ASX 300 Banks

ASX 200 Selling Pressure

June Quarter retail sales are up 1.4% over the preceding quarter, the best June Quarter since 2012.

Retail Sales

Vehicle sales for June 2017 also reflect healthy growth over previous financial year ends.

Residential Building Approvals

Despite the good figures, one should not ignore Bill Evans’ more sombre assessment of the latest RBA forecasts:

From our perspective, a fall in housing construction; subdued consumer spending and a drag on services exports from the high Australian Dollar will constrain employment growth through 2018. The [Reserve] Bank sees things differently, expecting recently strong employment growth to persist into 2018, with the unemployment rate expected to fall to 5.4% by the end of 2019 compared to our current forecast that the unemployment rate will in fact be rising through 2018, reaching 6% by year’s end.

Two other domestic factors are important, firstly the Bank is of the view that “wage growth is expected to pick up gradually over the next few years”. That is despite convincing evidence offshore, that countries with full employment, and in the case of the US, an unemployment rate considerably below the full employment rate, are not experiencing wage pressures. This different assessment of household income growth is one of the key explanations behind our more downbeat view of the economic outlook. Secondly, we expect that the wealth effect from sharply rising house prices in NSW and Victoria is about to reverse. There is no argument that household debt levels are elevated. The prospect of very limited further increases of house prices in those markets may start to dampen consumer spending in particular by discouraging households to further subsidise consumption growth by lowering their saving rates…..

  • Falling housing construction;
  • Slow consumption growth;
  • Slow services export growth;
  • Slow employment growth;
  • Slow wages growth; and
  • Slowing house price growth.

I think Bill is right on the money, but there are always other variables like iron ore and Chinese financial markets that can disrupt even the best forecasts.

Iron ore looks set to retrace to test support between 68 and 70. Respect would signal a primary advance but I suspect that support at 60 is likely to be tested.

Iron Ore

ASX 300 Metals & Mining is also likely to retrace, but bearish divergence on Twiggs Trend Index warns of selling pressure. Respect of 2950 would signal a primary advance but a test of primary support at 2750 is as likely.

ASX 300 Metals & Mining

The ASX 300 Banks index retreated below support at 8500. Follow-through would test primary support at 8000. Declining Twiggs Money Flow, with a large peak below zero, warns of strong selling pressure.

ASX 300 Banks

Declining Twiggs Money Flow also flags strong selling pressure on the ASX 200. Breach of support at 5650 is likely and would signal a primary down-trend. Follow-through below 5600 would confirm.

ASX 200

Australia: Housing, Incomes & Growth

A quick snapshot of the Australian economy from the latest RBA chart pack.

Disposable income growth has declined to almost zero and consumption is likely to follow. Else Savings will be depleted.

Disposable Income & Consumption

Residential building approvals are slowing, most noticeably in apartments, reflecting an oversupply.

Residential Building Approvals

Housing loan approvals for owner-occupiers are rising, fueled no doubt by State first home-buyer incentives. States do not want the party, especially the flow from stamp duties, to end. But loan approvals for investors are topping after an APRA crackdown on investor mortgages, especially interest-only loans.

Housing loan approvals

The ratio of household debt to disposable income is precarious, and growing worse with each passing year.

Household debt to disposable income

House price growth continues at close to 10% a year, fueled by rising debt. When we refer to the “housing bubble” it is really a debt bubble driving housing prices. If debt growth slows so will housing prices.

House price growth

Declining business investment, as a percentage of GDP, warns of slowing economic growth in the years ahead. It is difficult, if not impossible, to achieve productivity growth without continuous new investment and technology improvement.

Business investment

Yet declining corporate bond spreads show no sign of increased lending risk.

Corporate bond spreads

Declining disposable income and consumption growth mean that voters are unlikely to be happy come next election. With each party trying to ride the populist wave, responsible economic management has taken a back seat. Throw in a housing bubble and declining business investment and the glass looks more than half-empty.

Every great cause begins as a movement, becomes a business, and eventually degenerates into a racket.

~ Eric Hoffer

ASX banks spoil the iron ore party

I underestimated the strength of iron ore which has now broken resistance at 70, suggesting that a bottom is forming. Strength of the latest rally indicates that the next correction is likely to find support at 60.

Iron Ore

The Resources sector responded, with the ASX 300 Metals & Mining index headed for a test of its February high at 3200 after recovering above support at 3000.

ASX 300 Metals & Mining

Banks have been on the receiving end, however, with the ASX 300 Banks index testing short-term support at 8500. A Twiggs Money Flow peak below zero warns of strong selling pressure. Breach of 8500 would signal another test of primary support at 8000.

ASX 300 Banks

The ASX 200 continues to form a narrow line, consolidating between 5600 and 5800. Declining Twiggs Money Flow, with a peak below zero, warns of selling pressure. Breach of support at 5600 remains likely, despite the iron ore rally, and would signal a primary down-trend.

ASX 200