Our stock market finished the week at a 10 and half year high on Friday but how did we do it, with the US going to ‘war’ with tariffs directed at China? And given what Wall Street did overnight, with the Dow up 99 points, you’d have to think the local gains for shares aren’t over yet!

The S&P/ASX 200 index closed on Friday up 56.8 points for the day and 77.7 points higher (or 1.3%) for the week at 6272.3. This the best level since January 2008! But I ask: how did we do it, with the trade war that started at 12 am in the USA on Friday or 2pm Aussie time?

Let’s deal firstly with why the trade war has been treated like a pop gun affair. And that’s the point that the $US34 billion worth of US tariffs involved with Chinese goods is seen as small and manageable for the market. Even after adjusting valuations for companies such as Harley Davidson, which said its sales would be affected causing it to make some of its products in South America, the collective stock price effect has been small.

And even though China has struck back (they’ve done that with what they said), it looks like an equal measure thing. If they had ramped it up, then the market might have feared the President Trump threat that $200 billion of tariffs could follow!  “As long as the negotiations are more tit-for-tat than a cannonball into the pool, … I think the market will be fine,” said Eric Freedman, chief investment officer at U.S. Bank Wealth Management on CNBC.

Freedman says there has been a $500 billion Trump tariff threat earmarked for the Chinese if they don’t play ball. I believe that’s when the pop gun would become a nuclear bomb!

We’re not there and that’s one reason why US stock markets spiked higher on Friday. Another reason for this spike was a great jobs report, again! Those wanting to downgrade the US economic recovery will have to do some clever explaining for their position on this.

A Reuters poll of economists tipped a 195,000 gain in jobs in June but 213,000 showed up. But unemployment went up from 3.8% to 4% and wages growth was 2.7% rather than the consensus guess of 2.8%.

The lack of booming wages and the trade war threat has made some Fed watchers say that all up, there could be a case for the US central bank to hold back on too many interest rate rises in a short timeframe. This kind of speculation is also helping US stocks track higher.

For those wanting to be negative on the rise in the jobless rate, this neat explanation of a rising participation rate by USA Today shows why US business journalism is so readable.

“The 601,000 increase in the labor force – made up of people working and looking for jobs – overwhelmed the additional 102,000 who were employed, according to the household survey. That’s what caused the unemployment rate to rise to 4%, the highest level since March.”

A rising participation rate is a good sign for an economy’s outlook.

Now let me get back to the great local rise in stocks. Despite trade war concerns, the re-loving of the banks continued, with finance stocks up 2% this week. Materials struggled, with China and the trade war story not great for the prices of coal and iron ore.

The standout story for our top 20 stocks had to be Telstra, with a 6.7% spike for the week. And while the better story from CEO Andy Penn recently (at the company’s ‘strategy day’) has created some confidence, a lot of this rise had to be the re-buying of Telstra stocks by those who sold before 30 June to use the losses to offset gains on stock sales to reduce their capital gain tax bills.

The ramping up of Telstra’s investment (by $125 million in its technology play with private equity firm HarbourVest) to create a new fund worth $675 million was well-received by the market.

The ‘here we go again’ story of the week has to go to the star of shock stock stories – Bellamy’s Australia. Its share price slumped 19.6% over the week, following a Goldman Sachs note that the company’s product would face some Chinese regulation hurdles. These sovereign risk issues with companies highly dependent on China means you can’t confidently let these stocks be too important in your portfolio, unless you’re a thrillseeker.

What I liked

• Retail trade rose by 0.4% in May, following an upwardly-revised 0.5% increase in April (previously up 0.4%). But annual spending growth fell from an upwardly-revised 2.7% (previously up 2.6%) to 2.5%.
• The Australian Industry Group (AiG) Performance of Services Index (PSI) rose for a 16^thconsecutive month to 63.0 points in June, up from 59.0 points in May – a record high. Readings over 50 signify services sector expansion.
• The trade surplus rose from a downwardly-revised $472 million (previously $977 million) in April to $827 million in May. It was the 10^thsurplus in 12 months.
• Australia’s annual exports to China rose from US$100.78 billion in April to US$102.65 billion in May – a new record high.
• The Australian Industry Group (AiGroup) Performance of Manufacturing Index fell from 57.5 points to 57.4 in June. But the CBA/Markit Manufacturing Purchasing Managers’ Index rose from 53.2 points to 55.0 in June. Both surveys have readings above 50 points, indicating that the manufacturing sector is expanding.
• ADP private payrolls in the US rose by 177,000 (survey: 190,000) in June. The ISM Non-Manufacturing Index rose by 0.5 points to 59.1 points (survey: 58.3 points) in June.
• Shares of BMW, Daimler, Porsche and VW closed up to 4% higher after the US ambassador to Germany reportedly told German car bosses that US President Trump would suspend threats to impose tariffs on imported EU cars, if the bloc removed duties on US cars.
• Micron Technology shares rose 2.6% after it confirmed that China’s blocking of some chip sales won’t materially impact its revenue.
• The ISM manufacturing index in the US rose from 58.7 to 60.2 in June (forecast 58.4) but employment, orders and prices were all lower.

What I didn’t like

• The CoreLogic Home Value Index of capital city home prices fell by 0.3% in June to stand 1.6% lower over the year. The national home price index fell by 0.2% in the month to be down 0.8% over the year.
• ANZ job advertisements fell 1.7% in June but it was from 7-year highs.
• The Performance of Construction index (PCI) fell from 54 points in May to 50.6 points in June – the 17^thconsecutive month of expansion, but the lowest level in 17 months. Readings over 50 signify construction sector expansion.
• Construction employment fell by 3.3 points to 48.2 points in June – the lowest level and the first contraction in jobs in 17 months.
• Council approvals to build new homes fell by 3.2% in May – the third fall in four months. But the rolling annual total of approvals rose to a 15-month high.
• The weekly ANZ-Roy Morgan consumer confidence rating fell by 0.8% to 121.4, but this was still above the average of 113.9 since 2014 and average of 112.9 since 1990. On the good side, the 4-week average confidence index stands at a 4½-year high.

One big like

There has been a bit of ‘expert’ talk about a pending US recession and surveys are showing that investor nervousness in the States is at elevated levels, which I’ve often found to be a good sign that nothing will happen because the majority is often wrong when it comes to stocks! There are concerns about rising interest rates but I think this is a natural process of an improving economy so I’d only start to get negative if the US economy looked like it was faltering. This chart below from USA Today’s coverage of the June job numbers keeps me positive, though watchfully so.

The Week in Review:

• I asked some of the smartest investors I know to share their top stock picks for the new financial year! Here are 11 of their best.
• Despite a drag from financials and telcos, Australian shares had a good financial year. Paul Rickard offered his view on the market with a fresh portfolio update.
• With Telstra and the big four not so bankable anymore when it comes to yields, James Dunn gave four ‘outside the square’ alternatives.
• Our Hot Stocks’ picks this week were Greencross and Flight Centre. Find out why!
• In our first Buy, Hold, Sell – what the brokers say, there was plenty of positive momentum, with 11 upgrades versus nine downgrades. And in our second edition, Atlas Arteria and Iluka Resources saw upgrades, while Domino’s Pizza was downgraded.
• Charlie Aitken pointed to a major clearance sale on Chinese stocks! You won’t want to miss out on these bargain prices.
• Tony Featherstone named three alternative stocks that benefit from the baby-boomer megatrend.
• Businesses that continue to be run by their founders often outperform those that aren’t. Nathan Bell looked at how insider ownership can thrash the market.
• Our Professional’s Pick this week was Paragon Care, a medical supply company.
• And in our Questions of the Week, we answered readers’ queries about companies with US dollar earnings and Asian stocks.

Top Stocks – how they fared:                                                              

What moved the market?

• All eyes were on the brewing trade war between China and the US this week as the deadline for US tariffs on Chinese goods approached. The tariffs went into effect at midnight Friday morning in Washington.
• Trade tensions saw global commodity prices fall, with the Bloomberg Commodity index falling by 1.9% – its biggest drop since 2016. Iron ore and base metal prices also came under pressure during the week, negatively affecting resource stocks.
• The RBA kept the cash rate on hold at 1.5% for the 21^st consecutive meeting and predictions for a rise pushed largely to 2019.

Calls of the week:

• Charlie Aitken made a call to go long on Chinese stocks, despite growing trade war fears.
• Australian basketballer Daniel Kickert made a call to retaliate with an elbow to the head after a Philippines player delivered a hard foul during the FIBA world cup – triggering one of the wildest brawls in professional basketball history.
• It’s tat-for-tat with China and the US, as China made the not unexpected call of slapping down its own tariffs on American goods. 

The Week Ahead:

Australia

• Sunday July 8 – Reserve Bank Assistant Governor speech
• Tuesday July 10 – NAB business survey (June)
• Wednesday July 11 – Monthly consumer confidence (July)
• Wednesday July 11 – Housing finance (May)
• Thursday July 12 – Credit & debit card lending (May)
• Friday July 13 – Lending finance (May)

Overseas

• Tuesday July 10 China Inflation (June)
• Tuesday July 10 US NFIB Small Business Optimism Index (June)
• Tuesday July 10 US JOLTs – Job Openings (June)
• Wednesday July 11 US Producer prices (June)
• Thursday July 12 China Money supply & lending (June)
• Thursday July 12 US Consumer prices (June)
• Thursday July 12 US Treasury Budget (June)
• Friday July 13 China International trade (June)
• Friday July 13 US Export & import prices (May)
• Friday July 13 US Consumer confidence (July)

Food for thought:

• “When you reach the end of your rope, tie a knot in it and hang on.” – Franklin D. Roosevelt

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.

Charts of the week:

• Is the World Cup affecting your work life balance? Check out the chart below for a country comparison. 

• How long does it take to pay off a credit card? According to the chart below, a $2,000 credit card debt would take 17 years to repay if you make the minimum repayments. The chart below is based on average credit card rates of 17%.

 Source: ABC News

Top 5 most clicked:

1. 11 top stocks for 2018-19 from top stock pickers! – Peter Switzer
2. 4 ‘outside the square’ high yielders to consider – James Dunn
3. Buy, Hold, Sell – what the brokers say – Rudi Filapek-Vandyck
4. China clearance sale on now! – Charlie Aitken
5. 3 alternative stocks for the baby-boomer megatrend – Tony Featherstone

Recent Switzer Super Reports:

Monday 2^nd July: Happy new financial year!

Thursday 5^th July: Sale, sale, sale!

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.