S&P/ASX 200 Fundamental Analysis – August 16, 2016 – Forecast

The S&P/ASX 200 Index finished at 5540, up 9 points or 0.2 percent higher on Monday as investors prepared for the release of the minutes from the Reserve Bank of Australia at 0130 GMT. The Australian sharemarket rebounded into the close, after a National Australia Bank (NAB) quarterly updated encourage investors to buy bank shares. Strong earnings reports from JB Hi-Fi and Orora sent these stocks into new all-time highs.

MONDAY’S RECAP

The nine-point gain by the index was a struggle, however, after a sharp sell-off in mining stocks early in the session drove prices lower. Pressuring the market was a drop in BHP Blliton, which fell 2.5 percent and weighed heavily on the benchmark index.

Monday’s volatile price action was essentially fueled by the bearish movement in natural resource-related shares early in the session and by financial sector stocks later in the day.

Commodity-linked stocks sold-off on profit-taking after a recent strong rally. Follow-through selling from Friday’s losses was behind the weakness as investors continued to react to disappointing data from China released late last week.

The index was primarily driven lower by two companies: Rio Tinto and BHP Billiton, but supported by a rally in a slew of financial stocks.

TUESDAY’S FORECAST

Tuesday’s price action is likely to be driven by more of the same: hard assets or commodity-related shares and paper assets or bank stocks.

Right from the start on Tuesday, volatility is likely to be present with the release of the minutes from the Reserve Bank of Australia’s monetary policy board meeting on August 2. At this meeting, the central bank cut its benchmark rate 25-basis points from 1.75% to 1.50%.

The Australian Dollar’s reaction to the news indicates that investors felt the RBA’s statement was dovish. Investors see one more rate cut in this interest rate cycle, but that is not expected until early 2017. Traders will be looking at the minutes for clues that suggest a rate cut may come even earlier. This would be bearish for the Aussie and could hurt bank stocks.

Currently, the low interest rate environment is putting pressure on net interest margins. NAB’s quarterly profit update released on Monday showed this with cash earnings lower by 3 percent for the quarter, driven by higher funding costs and bad debt charges. Nonetheless, its numbers were impressive enough to help boost the entire bank sector.

Trading conditions could become more volatile later in the session on Tuesday with the release of fresh data from BHP Billiton. The stock fell 2.5 percent on Monday, but could fall even further since today’s report is expected to be marred by big writedowns. Some traders are saying the miner is expected to unveil one of the biggest losses in its history.

The best scenario for bullish traders will be RBA minutes that help bank stocks and a less-than-expected loss by BHP Billiton. Minutes that suggest a sooner-than-expected rate cut and a much larger loss by BHP will be good for the bears.