“BHP Billiton slumped after the Australian dollar rose against the greenback.”
“Qantas and Virgin surged today after a fall in oil prices.”
These types of statements can be heard on a daily basis at the end of the TV news, and they all might be right. But what does it all mean, and why do these other markets matter?
The truth is, these things all matter to people trading in Australian shares.
Currency fluctuations have the most widespread impact on share prices.
For most exporters, businesses that have large US operations and also for domestic tourism operators, a fall in the Australian dollar compared to the US dollar is great news because it makes their products cheaper on the international market.
It’s even better news for companies that make or derive their products in Australia who sell into a market priced in US dollars. Big winners in this situation would be miners such as BHP Billiton, Fortescue Metals Group as well as exporters such as Amcor and CSL.
A rising Australian dollar will obviously have a negative impact on the above type of company, yet there will be winners. Importers see the biggest benefit from a stronger dollar.
Retailers such as David Jones and Harvey Norman are among those that can bring in foreign products at a cheaper price than before, and sell them at the same rate, excluding a domestic discounting. Qantas and Virgin Blue also benefit from a strong Australian dollar because major costs such as fuel and aircraft are priced in US dollars.
Commodity markets also play a major role. The metals and mining sector is the largest industry on the ASX, with more than 700 publicly traded companies, from minnows to the world’s biggest miner. While rises in the price of commodities such as iron ore, coal, zinc and other metals is great news for investors in terms of higher revenue, a slump in the price of such products obviously leads to a decline in revenue. The more challenging problem for miners comes when prices drop below what is needed for a mine or other facility to remain open.
Other commodities impacted by fluctuating commodity prices include sugar and wheat exports, which are also priced in US dollars, leaving these exporters exposed to both commodity and currency fluctuations.
A fall in oil prices is great news for airlines, as well as transport operators such as Toll Holdings, while a rise would lead to higher costs which would then impact their profitability.
While the impact of currency and commodity price fluctuations might seem clear, global bond markets also have an impact on ASX trading prices.
Government bond yields have historically represented the “risk free” rate of interest, above which all corporates find their debt to be financed at. For example, a toll road company might have a new debt issue priced at an agreed amount of basis points above the bond rate.
So for investors in companies with high debt to equity ratios, the cost of debt rises and falls with the fluctuations in the bond market.
Bonds are also a rival investment product to stocks, and therefore the attractiveness or otherwise of bond yields can lead investors to switch out of one product to the other.
With bond yields worldwide at low levels in recent years, higher-yielding shares have been more attractive to investors seeking strong returns.
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