When the Banks and Miners Fire Together

When the Banks and Miners Fire Together

Looks like the Aussie market is going to close down today after US stocks had a rough session overnight.

I’m not sure we should be too fazed by it all though. You might not realise that the ASX 200 had a strong rally from 9 February to the close on Tuesday. A pullback is no surprise.

What matters now is this: Where do we go from here?

Turn volatility to your advantage

Well, one point of reference is that sharp drop we saw in early February. The index went down to 5,786 points.

Traders will now be watching to see if the market makes a ‘higher bottom’, using that previous low as a reference point.

That’s jargon to say they’re looking to see that the index doesn’t go down to 5,786 points a second time…before moving up again.

That’s one scenario that could play out. But keep an eye on it. If a higher low happens, it would suggest strength rather than weakness in Aussie stocks.

And turn these rough periods in the market to your advantage. It’s fruitful to keep an eye on stocks that finish up for the day when the wider market is down.

It means buyers are stepping in regardless. This is a good way to get a strong watchlist going for trading and investment ideas.

You can also see how any stocks you currently own stand up to a little bit of extra pressure. Do they pass the test?

You might like to also note something else. As I write, the cryptocurrency market is mostly in the green.

That’s one of the appeals of cryptos. They’re not correlated to the other asset markets, especially stocks.

That’s a positive thing in this world, where there’s simply so much money chasing a limited supply of assets.

You don’t have to believe me on that last point. In today’s edition of The Australian, the private equity guys are saying that they have billions in cash and not many deals happening right now.

And now the stage is set for investment property loans to make a comeback…

When history rhymes, but doesn’t repeat

Wayne Byres is the Chairman of Australian Prudential Regulation Authority (APRA).

In today’s news, he’s told a Senate hearing that the need for the limit put on investor loans in 2014 may be reducing.

That means the big banks are getting the green light to start cranking them up again.

However, one catch for the financiers is that higher risk loans (like interest-only deals) are likely to need more capital set aside. That reduces the profitability of these borrowers, all else being equal.

One result: Borrowers are likely to become increasingly segmented into a higher number of categories, and charged varying interest rates.

But it’s unlikely the banks will put up with lower profitability in general for long.

One potential way around this capital charge is to crank up the securitisation market again. This was hot before 2007, but the GFC wiped most of it out.

If the banks can sell off (‘securitise’) their loans, it takes them ‘off balance’ sheet…and the need to hold capital against the loans goes down.

That’s how the entire securitisation market began 30 years ago — banks trying to get around the rules put in place.

My only hesitation in suggesting such a thing is that it seems too obvious.

History certainly rhymes, but it rarely repeats exactly.

Unfortunately, The Daily Reckoning Australia cannot tell you today how this plays out for now. We can only track it from here and see what develops.

A rising banking sector is good for one thing at least: The stock market.

The big banks make up something like 30% of the index.

The general perception is that credit growth will stay modest, and they’re keeping their earnings stable by cutting costs and boosting efficiency.

A genuinely large expansion of credit is what needs to happen to really see the banks move up strongly.

If that can come in as the big miners are lifting, then we might see the Aussie share market break into a sustained move higher. Mining was in a bear market from 2011 to 2016. The banks were stronger over this period.

We need both sectors to fire at the same time to really get the index moving.

We’ve all been waiting long enough. Stock markets all around the world moved into all-time highs long ago…but we’re still dawdling along mostly.

It’s one reason I encourage you to consider stocks at the small-cap end of the market. They have much more room to grow…and a lot faster.

See for yourself here.


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Callum Newman
Editor, The Daily Reckoning Australia