au stock focus national australian bank risk of a mean reversion decline 1844482017

Since post U.S. presidential election, 09 November 2016, global stock markets had continued to rally in anticipation of the implementation of Trumponomics where President Trump had promised bold tax reforms (both corporations & individuals), financial deregulations (scrapping of the Dodd-Frank Act) and pumping up infrastructure spending with a U.S$1 trillion budget.

The potential financial deregulations policies had triggered resurgence in banking stocks that are leading the current bullish run seen across global stock markets. After lagging behind its global counterparts, Australia banks have played a “catch up” as expected from mid-February 2017 (click here for a recap on our previous research report) and it has now outperformed the KBW Global Banks Index slightly (16.05% versus 15.65% – refer to chart 1).

Australian banks is a leading sector that has clearly outperformed the benchmark ASX 200 (refer to chart 1), thus these banks’ future stock price movement is likely to create a significant ripple effect on the broader Australian stock market. From both fundamental and technical analysis perspectives, the current rally seen in the “Big 4” Aussie banks has been “overstretched” where they now face the risk of a multi-week decline.

Chart 1 – Performance of Australian “Big 4” banks

(Click to enlarge chart)

Fundamental factors

• The “Big 4” banks; ANZ, CBA, NAB and Westpac have received a larger proportion of their funding from wholesale debt investors compared with European and Japanese banks. In addition, the majority of the wholesale debt funding comes from the U.S.
• In past one week, Fed’s speeches from key officials such as chairwomen Janet Yellen, Loretta Mester (Cleveland) and Patrick Harker (Philadelphia) have indicated a higher tolerance of higher interest rates given the current state of the U.S. economy where its labour market continues to improve. These recent hawkish comments from these Fed officials have increased the prospect of a Fed’s interest rate hike in the next FOMC meeting on 15 March 2017. As at 23 February 2017, the Fed Fund futures market has priced in a 22% probability of a 25bps hike in the upcoming March FOMC meeting, the probability of a rate hike has increased from 13% around a week ago.
• The prospect of an increase in U.S. interest rates will drive up funding costs for Australian banks. Also, the cost of shifting funds from U.S. dollars back into the Aussie dollars has also surged to 30 basis points from 12 basis points seen in January 2016 which translates into higher costs for Australian banks.  In addition, S&P Global Ratings has reiterated its negative outlook on Australia’s sovereign debt rating that it may downgrade its current top rating of “AAA” due to a bleak prospect over its fiscal deficit. Therefore, it will be a “double whammy” for Australian banks as their funding costs will increase further if Australia sovereign rating is being downgraded.
• Therefore, an increase in funding costs is likely to reduce the profit margins of Australian banks.

Now, let us examine the technical elements of one of the “Big 4”; National Australia Bank

Technical Outlook on National Australian Bank (NAB)

(Click to enlarge chart)

Key technical elements

• The recent 27% rally from its 09 November 2016 low of 25.14 has led the price action of NAB to hover right below a key medium-term resistance/inflection zone of 32.50/33.50.
• The 32.50/33.50 is being defined by a confluence of elements; a Fibonacci cluster and the swing high area of 24 June/31 July 2015 that preceded a 28% decline in the stock price to print a low of 23.82 on 10 February 2016.
• The daily RSI oscillator has flashed a bearish divergence signal at its overbought zone which indicates that the recent upside momentum of price action has started to wane. Interestingly, a prior similar bearish divergence signal that occurred in Oct 2016 had led to a 10% decline in price action.
• The significant support rests at 29.40 which is defined by the former resistance level of its multi-month sideways configuration from February to December 2016 that had seen a bullish breakout and the 38.2% Fibonacci retracement from the recent steep ascend from 09 November 2016 low to the 32.23 high printed on 23 February 2017.

Key levels (1 to 3 weeks)

Intermediate resistance: 32.50

Pivot (key resistance): 33.50

Support: 29.40

Next resistance: 36.66 (descending trendline from May 2007 high)

Conclusion

The recent rally has been overdone and as long as the 33.50 pivotal resistance is not surpassed, NAB is likely to see a potential multi-week mean reversion decline to target the 29.40 support.

However, a clearance above 33.50 (a daily close is required) may invalidate the bearish bias to see a continuation of its upside movement towards the next resistance at 36.66

Charts are from eSignal

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