Australian Market Preview 25 June

Since the 23 March low, markets all around the world have risen to form a "V" shape in prices. When trying to understand the current state of the markets, and how they may be impacted by a second wave of Coronavirus cases, one must consider two important facts: 1. Markets look forwards, not backwards. Markets are now moving not on what has occurred in global economies, but what the nature of the recovery in global economic activity will look like over the next 12-18 months. 2. Equities more specifically, move on expected earnings. Not Robinhood investors, not on "sentiment", not on what some Whitehouse official accidently said. Rather, it is the impact of future company earnings by literally all available information combined, that moves individual stock prices.

So, if we've had a V shaped recovery, investors have already priced in a V-shaped recovery in earnings. This is a double edged sword for investors. On one hand, their portfolios have avoided some devastating losses this year, but on the other, any information that appears contrary to the actual occurrence of a V shaped recovery is going to cause the market to reassess its initial expectations, and push prices lower again.

US stocks fell by their largest amount in nearly 2 weeks on the back of rising Coronavirus cases in a number of states. States like New York have moved to enforce quarantines on travellers from the worst affected states of Alabama, Arkansas, Arizona, Florida, North Carolina, South Carolina, Washington, Utah and Texas. The fear is, this may lead to another round of tightening of restrictions and worse still, a return to lockdowns in the world's largest economy.

The selling was broadbased with most "risk-on" (that is, assets most likely to benefit from renewed economic growth), experiencing falls of between 2-3%. Crude oil in particular was hard hit, tumbling 6.3%. The only index on the rise was the Volatility Index (VIX) which spiked nearly 8%. The VIX is the represents the market's expectation of volatility 30 days into the future, and is often described as the 'Fear Index'.

The data from a number of countries recently has been confirmatory of a possible V shaped economic recovery, and this has aided the market in maintaining its post-March gains. Unfortunately for markets, in the face of rising US Coronavirus cases, there just wasn't any of it last night…and so markets were left to focus solely on the Coronavirus case news.

Also, with a bank holiday in China today, and no major economic data releases due in the Asian trading session, markets locally will likely reflect the losses suffered in the US session. Tonight however, markets will get an important piece of the recovery puzzle in the form of US Durable Good Orders. This data generally provides a good insight into both business and consumer expectations, as neither would invest heavily in expensive durable goods without confidence about the future.

Atferpay made a new all-time high yesterday, topping out at $62.33 before pulling back to close around its session lows. The poster-child of the 'buy now, pay later' concept has outperformed the S&P ASX200 by an impressive 54% over the last 3 months. This means that APT is now worth $15billion in market capitalisation, some 2 and-a-half times that of market stalwart AMP. Not bad for a company that hasn’t yet made a profit. Of course, as we said in the opinion piece above, markets look to future company earnings, and not current! So not making a profit should not be seen as an impediment to price appreciation. However, APT may potentially suffer from the same affliction the broader market has at the moment - expectations are high, and any sign that reality will differ from these expectations - will hurt the share price.

Looking at the technicals, we can see an uptrend in the short, medium and long term timeframes for APT shares. None of these trends look particularly challenged at the moment, but yesterday's inverted hammer candle shows supply has appeared in the market - at least on a short term basis. $62.33 now represents a point that will need to be closed above to once again take long positions - that is, if the price should move higher in the near term. If the price moves lower, which is the likely scenario today, look for price rallies from short term static support between the 10 June high of $54.85 and the 22 Jun low of $56.24. In the medium-to-long term, a pullback to the dynamic support zone around $52 would still be accommodative of the long term uptrend.