The week ahead: Australian equity markets remain lost in translation.

Market Updates

US equity markets continue to rally firmly, with the S&P 500, Nasdaq and Dow Jones all breaking record highs in the last five trading sessions.

Australian markets lost in translation

While US benchmarks continue to make new highs, the ASX 200 index, though trading robustly over the last month, remains below its own all-time highs, finishing last week at the 6,634 point level.

Despite the ASX 200’s underperformance in 2020, the Australian dollar has performed strongly since March, last trading around the 74 cent handle.

Looking ahead, analysts from Morgan Stanley recently argued that the Aussie has room to run higher as the global economy recovers, predicting the AUD/USD to trade around 77 cents in 2021.

With a recovered global economy likely a key component of equity market performance in the near-term and a core aspect of Morgan Stanley’s Australian dollar bull thesis, investors should continue to monitor COVID-19 figures across key countries such as the US, UK and India as well as upcoming global GDP and employment data releases.

The iron economy

A robust Australian dollar hasn’t put a lid on rising iron ore prices, with strong demand for the commodity pushing iron ore above US$135 per tonne last week.Iron ore remains key to both local equity markets and Australia’s general economic health – with iron ore export revenues surpassing $100 billion in 2020.

However, with around 80% of Australian iron ore exports directed to China and with geopolitical tensions rising between both countries, investors should pay particularly close attention to any new political developments between the pair, given the potentially pronounced impact new tariffs and/or other political manoeuvrings may have on equity markets.

It should also be noted that the Materials Index – which includes Fortescue Metals Group, BHP Group and Rio Tinto – accounts for approximately 20% of the ASX 200, with many of the companies in this sector still highly leveraged to the price of iron ore, which itself remains highly leveraged to Chinese steel demand.

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