RBA Confirms My 2019 Outlook, While Newcrest Breaks Out

In my first comment of the year I highlighted my trades of the year and so far they have played out well with the Australian Dollar and local bond yields plummeting. The RBA statement today confirmed what I have been highlighting for quite some time now as major risks for the Australian economy.

The RBA lowered its GDP forecasts for 2019 from 3.2% to 2.4% which is a huge reduction. All other measures of growth had been revised lower, underpinning why my trading strategies have been very defensive and structured to benefit from thematics that surface when economies slow and experience significant asset price (property) declines.

As a trader that means having the capacity to trade in all types of asset classes – not just equities or FX but also bonds and commodities. Too often traders have a view of a particular asset but then only trade a stock that is exposed to the underlying asset and not the actual asset itself. An example of this would be expecting the oil price to rise and then buying an oil producer or explorer. Unfortunately, it is a more riskier approach because while oil stocks and the oil prices do generally have positive correlations, owning an oil stock leaves you open to other risks like production issues and company-specific issues.

The first port of call for any trader should be the underlying instrument and that’s why with the my “easiest trade of the year” being long Australian bonds as the RBA is forced to cut rates due to a rapidly declining property market. I did not go and first buy infrastructure stocks or property trusts (which do benefit from lower interest rates) but can often underperform.

The charts below that since highlighting the RBA is on the wrong side of the Australian economy, bond yields have dropped over 20 basis points and the Australian dollar has dived 1.5 cents. There is a lot more to come and I reiterate that I see record low bond yields and the RBA cutting rates to 1% while the Australian dollar hits 60c. Stay cautious.

Which leads on to my next point that with my increasingly concerning views of the world – Italy is in a recession now, Germany teetering, and the world is completely awash with debt – which has brought gold and silver back onto the radar. Gold has started a recovery back towards US$1380. I have like many been waiting for a breakthrough this level to confirm the huge multi-year base that stretches back to 2013 is complete and a new major trend is underway. I believe that my bearish global outlook fits in well with the developments in gold and we could see gold breakout at the same time as bond yields collapse and equity markets enter a bear market.

It seems markets are slowly gravitating towards this theme.

Newcrest Mining (NCM) after its quarterly has quickly risen to be one of my favourite large-cap stocks as it benefits from the Australian dollar falling (gold is rising faster in local currency terms), better production numbers and lower costs (currently at US$720/ounce). This has seen several upgrades by analysts but the real ramifications have come from a technical point of view and it’s exciting. The fundamentals for Newcrest have finally started to improve and the charts have seen a great breakout across monthly, weekly and daily timeframes. It is often in these circumstances that huge re-ratings begin.

Below is the weekly chart of NCM and the recent break from its two-year consolidation. This is a very clear breakout that has triggered many indicators to signal that this latest move is the start of a more substantial move. Typically in such circumstances the rally prior to the consolidation is repeated. This should see a repeat of the 2015 rise of $16. Repeating that again should see an appreciation to $34.

Finally, the monthly chart has a trendline that stretches back to the record highs which has also broken that points to this recovery being amongst the strongest since the GFC. The MACD (middle indicator) managed to hold above zero and is only just starting to turn higher pointing to this still being in the early stages. RSI is still largely in the neutral zone and not signaling overbought or stretched conditions. This all reflects that NCM has a real opportunity to embark on a re-rating or catch up to its peers which have all outperformed strongly in recent years while NCM experienced production issues. Now that NCM looks to be overcoming those problems, the stock is primed for an all mighty rise.

As a trader, it is important to always understand the global context and background within which I am trading. If you can understand this landscape it can be very powerful in directing you to the best opportunities to make money. From this point of view, 2019 has started off nicely.

About Greg Tolpigin

Greg Tolpigin has over 20 years of experience as a proprietary trader and high-level strategist for the major investment banks including Citigroup, Bankers Trust and Macquarie Bank.

View more articles by Greg Tolpigin →