All Ords Report 07 June 2017

According to some broker reports earlier this month, oil was experiencing the “longest winning streak” since December.

I have to shake my head when I read commentary implying that oil has been booming when what has occurred is quite different.

Reports over recent months mentioned that a rally in oil prices occurred because of optimism about OPEC oil production cuts; Iran committed to fixing output for the rest of the year, but any support this would provide may be offset by US shale drilling.

This activity has created uncertainty, and uncertainty creates volatility, which means prices can move quickly one way or the other. Last week, following the supposed rally, oil dropped by around 6 per cent.

When I see words like “winning streak”, I immediately refer to my weekly price chart to put the rise in the oil price into context. Prior to last week’s drop oil was rising for just three weeks. The real rally occurred in the first half of 2016 to an early June high. However, since that high, the oil price merely traded sideways. Although it did break higher temporarily in December 2016, oil quickly fell back into the sideways move again. Of course, speculation and supply and demand have dictated this activity.

In my opinion, any “winning streak” was a short rise and not worthy of the headline. However, US oil may rally following a strong close on any day above $53.80, as such a move would increase the probability for a more sustained rise in the US oil price, with the next target between $58 and $64.

That said we must also consider the downside for oil. If oil falls below $48 the price is likely to continue the decline to between $43 and $45 in the shorter term. Either way, this presents a great opportunity for traders with the right knowledge.

What do we expect in the market?

This month, the strong positive for Aussie shares is how the All Ordinaries Index (XAO) finally broke through the level of the 2015 high at 5963.5 points to achieve 5983 points, before falling away slightly last week. It was possible for the fall last week to spill over into this week, however, the market has bounced back up towards the 2015 high this week.

It’s exciting to finally see the market trade to a new two year high as this move aligns with my longer term view that the bulls are still in control. However, the Australian share market is nearing a time when it is preferable to see it pull back for two to four weeks so as to provide support for a solid rise in the second half of 2017.

Given this, there are opportunities to profit by increasing your exposure to shares for the medium term, however, be selective. There has been a move to solid dividend paying stocks while the miners take a breather. That said Mining and Energy are areas to watch in the second half.

To the economic front in Australia, retail spending figures are still not where economists would like to see them. Reasons given are slow wage growth and higher household debt, offsetting lower interest rates.

First quarter 2017 inflation data indicates that Australia is slightly below forecast, however, economists see this as in-line with the forecast of 2.2 per cent for the year. Given this, currently the Reserve Bank of Australia (RBA) sees no reason to change guidance from a steady cash rate.

There are two areas the RBA are watching closely, being low wage growth and a constrained labour market. Financial stability is another area, which may receive more attention later in the year. That said it is unlikely for the RBA to consider raising the cash rate until late this year or early in 2018. In my opinion, it would be a mistake for the RBA to cut the cash rate any further.

Dale Gillham is Chief Analyst at Wealth Within