22 November 2023
The local bourse has had a decent week, with the ASX 200 adding 0.28% since last Tuesday. The US enjoyed a bigger lift, with the S&P 500 surging 3.74% in the same period of time – largely spurred on by its economy likely having smaller rate hikes going forward.
While the UK government is playing musical chairs with its prime ministers, the new Australian Labor government’s fiscal policy is being closely analysed upon the release of the new budget.
The government has laid out its planned spending cuts and tax increases that will form the basis of what it describes as a much-needed first year of budget repair.
The Albanese Government abandoned its pre-election pledge of reducing power prices by $275 a year until 2025, citing fundamental shifts in the energy market and the Russia-Ukraine war – factors that were not accounted for when the model was created.
It is now forecasting energy prices rising 20% this year, and a further 30% across 2023-24. This is expected to account for 0.75 percentage points in this financial year’s inflation, and 1% the next.
The April pre-election fiscal update had forecast a budget deficit of $78 billion, which is now believed to likely land around $36.9 billion due to strong commodity prices and low unemployment.
The NDIS is coming under increasing scrutiny with its new projected blowouts. While it is anticipated that taxpayers are up for $166 billion over the next four years to fund the program (around $41.5 billion per year), the cost is tipped to reach almost 2.5 times that amount ($102 billion per year) by 2032.
Comparing this to our nation’s fastest-growing expense – the interest payments on over $1 trillion (and growing) of debt, which is expected to cost over $70 billion annually in a decade – is certainly food for thought.
Interestingly, the government plans to sell $95 billion of treasury bonds in 2022-23.
On the markets, the XJO has regained losses from earlier in the month and closed near monthly highs. The index is still trying to close above the 50-day moving average. If the index can close above this, we would expect to see a continued strength and test resistance at 6894. The market has strong support at 6405.
Implied volatility is at 18% with an IV rank of 47. Markets are expecting major data to be released this week, including domestic inflation today, German inflation on Friday, and GDP for Germany and the US later in the week. Markets could see a release of the pent-up volatility and see the index trade higher before investors take profits and re-hedge.
Depending on an investor’s directional view, long calls are the way to go if the investor sees upcoming strength in the market along with an associated decrease in volatility. Conversely, long puts if the investor sees upcoming weakness and continued high volatility.
As more market pundits vouch for a potential global recession, we can expect large movements on both the stock and volatility front – something seasoned and rookie options traders alike will be watching closely.
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Past performance is not a reliable indicator of future performance.