All Ords Report 18/02/2015

Falling fuel prices are a bit like an economic stimulus package, where all Australians benefit. But not all forms of economic stimulus are fair, including the 0.25 per cent cut to the cash rate this month by the RBA, which has left thousands worse off. But that’s not all that isn’t fair.

Firstly, if you are a home owner with a mortgage hanging over your head, then the drop in the cash rate to 2.25 per cent and subsequent call by the banks to drop their lending rates, may have come as welcome relief. Those who are smart will use the cut to pay more off their loans or get ahead on other expenses because low rates don’t last.

However, where it’s unfair is that those who are most vulnerable in our community, particularly our retirees, who are relying on the interest from their term deposits, are now receiving less. This is likely to be making life increasingly difficult for them, as the ever increasing cost of living will continue to take more from their budgets.

If that isn’t enough, term deposit holders now have to provide at least 31 days notice to their bank or financial institution to be able to withdraw their funds. So, how is that fair? One has to wonder why this rule has been implemented. Looking at the issue logically, perhaps this has been legislated to protect the banks against a run on the withdrawal of bank deposits ahead of any future crisis, where there could be an exodus of funds from bank coffers.

This ahead of a pending decision to be made in 2015 by the Federal government which may see Australian financial institutions having to hold more capital. In a report last year, the Financial System Inquiry (FSI) recommended that banks increase the level of capital that they are required to hold against mortgages, and of course the banks rejected this recommendation.

When times are good, governments and regulators may tend not to make some of the tough decisions that might otherwise help to avert a future crisis, simply because of the political consequences. Or, if they do manage to get change through parliament, history shows how a future government unwinds what is done, and so the crisis is similarly repeated years later. The problem for governments in trying to be proactive is that when times are good there often isn’t enough support for change, and the critics who back the institutions seem to have the influence.

While depositors digest the changes around term deposits, the government debate continues as to whether Australia ought to adopt the European policy of ‘bail-in’ of depositors, in order to save failing banks. Malcolm Fraser himself said that Australia should fully separate retail banking from the speculative activities of investment banks, which the Glass-Steagall policy provided in the US until 1999 when it was repealed, and we all know what happened eight years later.

So what do we expect in the market?

The All Ordinaries Index (XAO) fell away last week over the first four days of trade, however given the strength of the prior rise, the fall represented a decline of only 1.7 per cent, which is quite normal and important for traders to see. The market had, over the prior two weeks, already risen by around 6.0 per cent, and was spurred on by the RBA’s decision to cut the cash rate.

At the end of last week, it was exciting to see the XAO continue to turn and trade up strongly, well above the lower band of my first target zone, between 5800 and 5950 points. This is a very good sign, and indicates that the probability of a further rise through the upper level, to around 6000 points has increased. That said, right now, we don’t want the market to get too far ahead of itself and therefore, I would prefer to see it come back again temporarily, between now and the end of March, so as to build greater support for the next rise.

Economic conditions are improving in many countries around the world, however, there is always the chance of some type of shock, which would increase market volatility. That said, whether you are a trader or an investor, you can sit back and enjoy the current rise. Also, a further strong rise as seen recently, means that any downside on our market in the short term is more likely to be short lived.

As a trader, my job is to also consider the downside, even if the market is strong. In preparation for a fall, and considering that the market has broken well into my first target zone for the year, I have revised upwards the level below where it may come back to test support, which is now 5600 to 5700 points.

Remember that analyzing the market requires training and experience, and if you would like to learn how there is really nothing to stop you.

Dale Gillham is Chief Analyst at Wealth Within