Switzer on Saturday

Jobs trump Trump. Fingers crossed for earnings

Founder and Publisher of the Switzer Report
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The Trump rally lost steam over the week, with the S&P/ASX 200 index losing 1.6% for the week. China coming back from holidays and tightening monetary policy didn’t help on Friday, hitting our big miners for notable losses.

But most of the negativity was delivered by the US President and his travel ban, with all the uncertainty it brought with it, though our great trade figures and the dollar nudging closer to 77 US cents had to have a role to play in the week’s stocks’ slide.

And don’t forget we’ve had a few disappointing early show-and-tells from public companies, which are telling us that if companies over the next few weeks do a Bellamy’s or an Aconex and fail to deliver on their promises, it will be no more Mr Nice Guy from the market.

However, next week might start off more positively, with US job numbers overnight helping the Dow to a big spike – up 168 points with two hours to the closing bell.

The UK’s Guardian wrapped Europe’s reaction to the US news this way: “Financial shares were boosted by the prospect of Donald Trump rowing back on regulation, while a rise in the oil price after new US sanctions on Iran lifted energy stocks. So markets moved sharply higher, with the FTSE 100 recording its best one-day rise so far this year. Even a fall in mining shares as China raised interest rates could not undermine the positive mood.”

The non-farm payrolls report was pretty good, with 227,000 jobs created in January, which smashed consensus forecasts of 180,000. However, a rising participation rate (a good economic outlook omen) did push the unemployment rate up to 4.8%.

This great number ordinarily might have hurt Wall Street, increasing expectations of an early interest rate rise from the Fed but wage data from the report might slow up the course of rate rises over 2017. Many experts think four hikes are possible but Mohamed El-Erian, Allianz’s chief economic adviser said: “This will make the Fed less likely to hike in March. It puts even more focus on structural measures to enhance wage growth.”

This Trump rally will have to eventually cope with rate rises but the best time for that will be when the US President has kicked some credible goals on the infrastructure and tax cut fronts.

“I think tax reform and infrastructure spending is what drives this economy forward, in terms of growth, in terms of wages, in terms of more inclusive expansion,” El-Erian said. “That is absolutely key.” (SMH)

Giving weight to his argument was the stimulus of less financial institution regulation talk overnight as a reason for the surge in US stocks on Friday. In fact, President Trump went to his executive orders bag of tricks and took aim at financial regulation.

This is how Bloomberg saw it: “President Trump signed two directives aimed at starting the process of rolling back the regulatory system put in place after the financial crisis.”

To bigger market matters and after a bad January for stocks, AMP’s Shane Oliver tested out that old stock market chestnut: “As goes January, so goes the rest of the year!”

“Since 1980, a negative January in Australian shares has gone on to a negative year only 31% of the time,” he revealed. “Perhaps more importantly – given its impact on the direction of global and Australian shares – the US share market rose in January by 1.8% and since 1980, a positive US January has gone on to a positive year 86% of the time.” I like that one Shane!

And while I’m milking Shane, have a look at this positive reading from the Purchasing Managers Index numbers around the world. “Looking globally, business conditions PMIs continued to improve in January, pointing to stronger global growth. Very different to a year ago when PMIs were heading down,” Oliver pointed out.

swos-20170204

Source: Bloomberg, IMF, AMP Capital

And on markets this year, this is Shane’s take: “A further short term consolidation or correction in shares is likely, as sentiment towards them remains very high. Trump related uncertainty will be with us for a while as we enter the seasonally weaker month of February. However, we see share markets trending higher over the next 12 months helped by okay valuations, continuing easy global monetary conditions, fiscal stimulus in the US, some acceleration in global growth and rising profits.”

And for currency watchers, Shane has an up and down view on the dollar.

“The $A has had a short-term bounce as the $US corrected from overbought levels,” he explained. “This could go further and see a retest of $US0.78. However, the downtrend in the $A from 2011 is likely to resume as the interest rate differential in favour of Australia narrows and it undertakes its usual undershoot of fair value. Expect a fall below $US0.70 by year’s end!” (My exclamation point, not his!)

What I liked

  • The NAB business conditions index surged from +5.7 points to +11.4 points in December, a 6-month high.
  • The business confidence index rose from +5.5 points to +5.7 points.
  • The index of trading conditions in the NAB survey rose from +9.8 points to +20 points (a 9-year high); profitability rose from +5.7 points to +14.3 points (a two-year high). That looks like great news!
  • Australia posted a record trade surplus of $3,511 million in December, up from the $2,040 million surplus in November.
  • The CoreLogic Home Value Index of capital city home prices rose by 0.7% in January and was up 10.7% over the year. Prices rose in seven of the eight capital cities, with Hobart up the most (up 1.4%). Regional house prices rose by 1.1% in December.
  • Australia’s annual exports to China lifted from $76.2 billion to US$80.2 billion in the year to December – a 23-month high and up 6.6% on a year ago and Commonwealth Bank group economists expect net exports (exports less imports) to contribute 0.8 percentage points to overall economic growth in the December quarter.
  • Private sector credit rose by 0.7% in December after a 0.5% gain in November – the strongest back-to-back gains in 14 months. Business credit rose by 1.1% in November – the strongest gain in 15 months!
  • New motor vehicle sales totalled 84,910 in January, up 0.6% on a year ago – and the second highest January result on record.
  • In China, new export orders recorded the highest reading since September 2014.
  • The ISM manufacturing index for the US lifted from 54.5 to 56.0 in January (forecast 55.0).
  • The ADP national employment index showed that private sector jobs lifted by 246,000 in January (forecast +165,000). That’s a huge miss to the positive!
  • The Fed wisely kept its funds rate unchanged as expected in a target range of 0.50-0.75%. The Fed said that “job gains remain solid” and “consumer and business sentiment have improved”.
  • Euro-zone economic data was positive. Economic growth in the Euro zone was 0.5%, as expected in the December quarter. Unemployment fell to a 7-year low with annual inflation at 1.8%, a near 4-year high.

What I didn’t like

  • The Performance of Services index fell 3.2 points from 8½-year highs to 54.5 in January. However, the index remains over 50, signifying expansion of the services sector.
  • New dwelling approvals fell by 1.2% in December after rising by 7.5% in November. It was the fourth decline in five months. In trend terms, approvals fell by 2.5% – the seventh straight decline.
  • The Performance of Manufacturing index fell by 4.2 points to 51.2 in January. A reading above 50.0 indicates that the sector is expanding. So it’s not all bad news.
  • In China, the Caixin services purchasing managers index (PMI) fell from 51.9 to 51.0 in January.
  • In Europe, investor sentiment was down after some disappointing earnings results, including those from Deutsche Bank, its share price sliding by 5.2%.
  • French populist Eurosceptic, Marine Le Pen, will make it into the second round polling with votes more than any other candidate at around 27%, but the independent former Economy Minister Emmanuel Macron (polling at 23%) or the Republican Party’s Francois Fillon (polling 20%) will defeat her in the second round (at 65% to 35% and 59% to 41% respectively). Let’s hope that’s right because I don’t want to think about Frexit!!

Yes, there is a Santa Claus…rally

Over the last 70 years, the Australian share market has risen in December some 73% of the time, lifting on average by 1.9%, making it the best month for stocks.

My big watch

Earnings here and in the US will be important for the stock market’s direction and I’m keeping my fingers crossed.

Top stocks – how they fared

20170203-topstocks

The week in review

What moved the market?

  • ‘The Donald’s’ polices, including controversial immigration measures.
  • A surge in Australia’s trade surplus.
  • The US Fed keeping its key interest rate on hold in a target range of 0.50%-0.75%.
  • And Apple’s strong earnings and iPhone sales.

Calls of the week

  • Donald Trump reportedly called his phone call with Malcolm Turnbull “the worst by far” of several calls with world leaders. He then took to Twitter to say: “Do you believe it? The Obama Administration agreed to take thousands of illegal immigrants from Australia. Why? I will study this dumb deal!” Tough week for Malcolm!
  • In this week’s Switzer Super Report, Charlie Aitken said the Aussie dollar could be headed to 80 US cents! Find out why.
  • And UK MPs voted four to one in favour of triggering Brexit negotiations, and to begin the process of departing the EU.

The week ahead

Australia

Monday February 6 – Retail Trade (December)
Monday February 6 – ANZ Job Advertisements (January)
Tuesday February 7 – Weekly consumer confidence (January)
Tuesday February 7 – RBA Cash Rate
Thursday February 9 – Reserve Bank speech
Thursday February 9 – HIA new home sales (December)
Friday February 10 – Housing finance (December)
Friday February 10 – Statement on Monetary Policy

Overseas

Tuesday February 7 – US Trade balance (December)
Tuesday February 7 – US Consumer credit (December)
Tuesday February 7 – China Caixin services PMI (January)
Friday February 10 – US Import price index (January)
Friday February 10 – US Consumer sentiment (February)
Friday February 10 – US Monthly Budget statement
Friday February 10 – China Trade (January)

Food for thought

There is no passion to be found playing small – in settling for a life that is less than the one you are capable of living.

-Nelson Mandela, former president of South Africa.

Last week’s TV roundup

  • To answer viewer questions about the Switzer Dividend Growth Fund and where the market is headed, Contango’s George Boubouras joins the show.
  • For a look at stock market trends and the companies he’s watching right now, Roger Montgomery from Montgomery Investment Management joins Super TV.
  • Is the trade threat the one big negative of Donald Trump? Economic commentator Terry McCrann answers this question and more.
  • And Charlie Aitken of Aitken Investment Management reveals how he’s planning on playing the Trump Presidency.

Stocks shorted

ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table shows how this has changed compared to the week before.

This week the biggest mover was Monadelphous Group with its short position increasing 1.91 percentage points to 9.78%.

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Source: ASIC

Chart of the week

Unprecedented trade surplus!

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Australia posted a record trade surplus during December of $3,511 million – that’s up from the $2,040 million November surplus! “At present a lot is going right for the trade balance. Not just stronger commodity prices but also a lift in volumes – particularly for coal,” CommSec’s Savanth Sebastian said.

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