Central bankers still in the box seat to drive world share markets

As we predicted last week, central bankers are increasingly driving the direction of currencies and share markets.

While our own Philip Lowe this week expressed great confidence in continuing growth in the Australian economy and indicated interest rates would stay steady for now, it was his US counterpart Janet Yellen who really set the cat among the pigeons by flagging another interest rate hike this year and three more in 2018.

What’s more, she also flagged the US Fed will next month begin shrinking its bloated US$4.5 trillion balance sheet which was created by an unprecedented orgy of bond buying (and effectively money printing) following the Global Financial Crisis.

To say share and currency markets are sensitive to this sort of announcement is a serious understatement.

Markets at the banker’s mercy as gobstopper is snatched back

Market players have been sucking on the gobstopper of low interest rates and easy money policies for years now and they cry like spoilt toddlers when it is removed.

That doesn’t mean the removal is not good for them – too much gobstopper rots your teeth – but we should expect some periods of intense pouting and foot stamping as global interest rates are slowly and carefully reset to more normal levels.

ANZ and NAB join the chorus saying that Aussie rates will rise next year

Two of our big banks, ANZ and NAB, this week also predicted two rises in Australian official interest rates next year which is probably a reasonably safe bet on the assumption that Philip Lowe might take a bit of a ride on Janet Yellen’s coattails, providing the Aussie dollar doesn’t rise too much.

There was no sign of that on Friday when the Jumbuck put in its worst daily performance for four months, slumping to US79.2c after it became apparent that Australia is likely to lag US interest rates on the way up and also on some emerging weakness for the iron ore price.

Tough time for investors

All of which makes it a tough time for share market investors.

Do we trust that these central bankers have a good handle on the US and Australian economy or will they stuff it up completely?

There are plenty of historical examples to support both cases but obviously a lot of Australian market watchers are far from convinced, with the ASX 200 falling 0.9 per cent on Thursday after the Yellen announcement – its worst one day performance in six weeks.

That oversold position unwound by 0.5 per cent on Friday to leave the ASX 200 down 0.2 per cent for the week.

Get ready for volatility

All of which tells us to expect plenty of volatility in the short term.

Fortunately, good small cap investors thrive on volatility and that makes for a great trading environment, with both macro trends and stock specific announcements throwing up plenty of opportunities.

Small cap action

There was plenty of small cap action that caught my eye this week.

“Pot stock” Zelda Therapeutics (ASX: ZLD) produced some interesting results using its therapeutic cannabinoid compounds to relieve the symptoms of autism. While it is early days yet, the results showed the cannabinoid compounds outperformed existing treatments with fewer side effects and this will be a big help in designing future clinical trials.

Thred Limited (ASX: THD) successfully changed course with the development of its consumer augmented reality app Sweep and an enterprise solution. It certainly went down well with investors with the stock firming an impressive 57 per cent on Thursday while the rest of the market was in the toilet.

So called “reg tech’’ stocks are worth keeping an eye on with Kyckr (ASX: KYK) kicking some goals with confirmation that leading financial news provider Bloomberg will be using its real-time company registry information soon. First Bloomberg revenues are expected in the second quarter of the 2018 financial year and this will be a great global platform for Kyckr.

Caeneus Minerals (ASX: CAD) found some high concentrations of lithium brines within a shallow aquifer at its Columbus Marsh Project in Nevada, which led to an immediate application for water rights at the site.

Eagle Health (ASX: EHH) also had some positive news with a deal with Omni Innovation to exclusively manufacture, market and distribute its clinically proven pre-meal shake product for Type 2 diabetes and Pre-Type 2 diabetes throughout mainland China.

It is part of Eagle Health’s ongoing efforts to use Australia’s clean and green reputation as a distinct marketing advantage in the world’s most populous country.

With estimates of more than 120 million men and women in China suffering from Type 2 diabetes in 2018 growing to over 160 million by 2030, that could produce some serious sales.

The week ahead

As for the week ahead, my best guess is that with a dearth of scheduled information out of China and for that matter Australia, the slew of data out of the US might have the most market moving potential.

Look out for data on national activity (Monday), home prices, consumer confidence and new home sales (Tuesday) and other data later in the week including durable goods, pending home sales, economic growth and personal income/spending.

Then there is a speech by Janet Yellen on Tuesday and of course the ongoing ructions over North Korea which could produce literally anything from a nuclear weapons test to some more sanctions.