Fears about Trump’s tariff talk, trade war tension and Telstra were big negatives for the stock market this week but our S&P/ASX 200 index defied the Dow’s eight-day losing streak to push into 10-year highs! Why? Here’s a list of reasons I put forward on Thursday in my Switzer Daily column:
- The lower dollar that has come with US interest rates rising and the greenback moving higher. A lower dollar is good for our economic growth.
- Morgan Stanley thinks foreign investors are “parking their money” here, with the Euro threatened by trade war talk.
- Some Chinese demand for expensive US goods could be diverted to Australia in a trade war, which could be good for education sellers and even beds from the A. H. Beard company, which already sell its products in China.
- China could also boost its demand for Aussie LNG, if the USA is to be punished for Trump’s tariffs.
- Also, if China’s economy is threatened by a US trade wall, it might stimulate its economy, which would pump up demand for the likes of our coal, iron ore and other mining products. And I guess Chinese tourists could be told to give the USA the flick, which would help us.
But the big one was the re-loving of our bank stocks, which started Thursday week ago, when CBA hit its recent low of $67.22. It finished on Friday at $73.86, which is a 9.8% turnaround!
Given the piece I wrote on Monday and some others before, this development has been happily received by yours truly.
This has helped my SWTZ fund, which has rebounded by 7.4% off its low of $2.42 a few weeks ago. “Australian shares have been boosted by a rebound in financial shares, which had become oversold the previous week as bargain hunters snapped them up for their dividends, a boost to consumer stocks from the passage of the Government’s income tax package and strong gains in defensives and yield sensitive REITs,” AMP Capital’s Shane Oliver explained.
The S&P/ASX 200 index lost 6.9 points on Friday to close a great week for stocks at 6225.2, which means a 2.2% gain for the week. CBA shares rose 7% for the week, Westpac climbed 5.3% to $29.38, NAB advanced 5.6% to $27.64 and ANZ rose 7.4% to $28.65, which was helped by telling us that it would double its buyback program.
And for Macquarie shareholders, its share price rose 4.1% over the week and has been pushed into record highs, thanks to a bullish outlook for the company from Morgan Stanley.
It’s also a good sign that takeovers are in the news, with APN up 12.7% as it pursues Here, There & Everywhere’s Adshel for $540 million, at the same time as JCDecaux puts a cool $1.1 billion on the table for APN Outdoor itself!
Imagine what might have happened to the index, which hit a 10-year high, if Telstra had actually impressed the market. The telco lost 8.8% after CEO Andy Penn revealed EBITDA would fall by a billion and analysts started to see a lower dividend after a year’s time.
Not all companies had a successful week, however, with Telstra a standout loser, as the telecom fell 8.8% to $2.68, as investors punished the firm after chief executive Andy Penn’s break-up strategy failed to offset a 2018-19 earnings downgrade. The stock ended the week at $2.68 after seeing $2.91 before Andy let the disappointing ‘cat’ out of the bag.
So can this positivity for local stocks be sustained? Clearly, Donald Trump’s trade war could derail this nice rally. And the fact that the news this week about the tit-for-tat tariff threats between China and the US President didn’t hurt our market, says that a lot of investors think this is a bluff game of poker. If a back down doesn’t come, then we might see some disappointing developments out of Wall Street that won’t be ignored here.
We also have to be mindful that there could be some end of tax year selling next week. I suspect a lot of Telstra’s sell off last week was exactly that, with many loss makers on the stock lining up for some tax offsets to reduce their potential capital gains tax bills.
Back to Donald and the US, and Wall Street was positive overnight, despite the President threatening a 20% tariff on all European cars, if the EU doesn’t give ground on reducing its protection measures.
And here’s an interesting take on how scared US investors are about the trade tensions right now.
“As bad as it may seem to some people, this is more of a re-allocation of resources,” said JJ Kinahan, chief market strategist at TD Ameritrade to CNBC. “The Russell 2000 and Nasdaq both hit all-time highs this week.”
Some expert commentators say the negatives from a trade war are already priced into the market but I don’t believe it. We simply don’t know how silly the actual US tariffs will be, given the new ones for European cars put forward overnight. And we don’t know how Europe, China, Mexico and Canada will retaliate.
On the good news for stocks but not petrol prices, OPEC ministers struck a deal regarding oil production levels in their countries, sending crude prices higher.
If a trade war can be averted, then I reckon we could see stock prices doing us proud for the rest of this year. Of course, there will be volatility. With Donald Trump in power, what can you expect? But it should be on a rising trend, provided these tariff promises don’t become a reality.
What I liked
- Employment rose by 57,900 in the three months to May, after a gain of 60,600 in the previous three months. Over the past 12 months, 307,600 people have found jobs, down from 415,900 in the 12 months to February – near the largest annual increase on record. A record 12.54 million Aussies are employed.
- Australia’s population expanded by 387,969 over the year to December 2017 to 24,770,709. Overall, Australia’s annual population growth rate fell from an upwardly-revised 1.67% (previous 1.6%) to 1.59% – still near the fastest population growth in three years.
- This stat will annoy lefties, who think bosses are exploiting employees, with the average weekly actual hours worked per person employed being just 31.8 hours – a record low!
- The Internet Vacancy index fell by 0.9% in May, after decreasing by 0.5% in April. The index is 5.8% higher than a year ago and is still at levels last seen six years ago.
- Good news for Western Australia, with job advertisements there at 3-year highs, up by 18% over the year to May. And vacancies are up by 23.7% in the state’s mining heartland (the Pilbara and Kimberley regions) at 4-year highs.
- The Bureau of Statistics reports that Australian home prices fell by 0.7% in the March quarter to stand 2% higher over the year – the weakest annual growth rate since September 2012. It sounds bad but the RBA and APRA wanted this to happen to cool down a too-hot housing market.
- From the ANZ consumer confidence reading, the views on family finances are the best in 18 months.
- The minutes from the June 5 Board meeting were issued. The Board’s neutral policy bias remains intact, with a period of record low interest rate stability ahead for the foreseeable future. It noted that “recent data had been consistent with the Bank’s central forecast for GDP growth to pick up to be above 3% by the end of 2018.”
- Over the past year, a record 800,240 permanent and long-term migrants moved to Australia, up by 4% and over the past year a record 1,419,500 tourists came to Australia from China, up by 12.9% over the year. Tourists from India totaled 324,500 visitors over the past year (a record high), up 18.6% over the year.
- The leading index in the US rose by 0.2% in May.
- The Nasdaq reached an all-time record high, led by shares of Facebook and Netflix, which both reached record levels.
- US housing starts rose by 5% in May to a 1.35 million annual rate (forecast 1.31 million).
What I didn’t like
- Trade war talk!
- The weekly ANZ/Roy Morgan consumer confidence rating fell by 0.7% to 122.1 but confidence is up by 9.2% over the year and above the average of 113.9 since 2014 and the average of 112.9 since 1990.
- Economy-wide spending slowed in May, growing at the weakest trend pace for over a year. The Commonwealth Bank Business Sales Indicator (BSI), a measure of economy-wide spending, rose by 0.3% in trend terms in May. The BSI had grown at a 0.8-0.9% trend pace from November 2017 to March 2018, before growth slowed to 0.6% in April and 0.3% in May.
- The US threatened a 10% tariff on $200 billion of Chinese goods, in response to China’s move to raise tariffs on $50 billion in US goods.
- The Philadelphia Federal Reserve manufacturing index eased from +34.4 to +19.9 in June (forecast +28.9).
- Shares of German carmaker Daimler fell by 4.3%, after warning that higher tariffs would hit profits.
Picking up good vibrations
Pauline Hanson backing the tax cuts was a turn up for the books. For this year they are symbolic, as the real benefit for consumers comes at the end of the financial year. And while the economist’s jury might be out on the total plus from the cuts for the economy, as the lawyer in that great movie The Castle would have put it: “It’s the vibe, your Honour. It’s the vibe.”
Yep, it’s a good economic vibe at the right time in our economic cycle.
I never expected to write this but “well done, Pauline.”
The Week in Review:
- Is the banks’ crucifixion over? Who else thinks they’re a buy? [1] Find out what I had to say in my article this week.
- Is Wesfarmers a sell? [2] Find out what Paul Rickard thinks!
- Tony Featherstone listed 3 stocks to take profits on in the new financial year [3]
- Tencent or Telstra? Alibaba or Woolworths? It’s time to get on board the Asian growth story. Charlie Aitken discusses China: where growth and value collide [4]
- Not all tech stocks are good value, and some are currently very overpriced. Roger Montgomery named the good and bad tech stocks. [5]
- With the EOFY coming up, James Dunn named 4 value buys for the next financial year [6].
- The Budget proposal to reduce SMSF audit frequency for ‘good behaviour’ is an interesting one, but how will it work? Graeme Colley [7] discussed SMSF audits.
- In the first Buy, Hold, Sell – what the brokers say [8], the Australian share market has posted only small net gains so far year-to-date (including dividends), but June might well add some more.
- And in the second Buy, Hold, Sell – what the brokers say [9], GUD Holdings and Macquarie Group got upgrades this week, while Mirvac was downgraded.
- In this week’s Hot Stocks [10], a local bank got the tick this week from our hot stock pickers.
- Plus, in this week’s Questions of the Week [11], Paul Rickard answered a question on investing in China.
Top Stocks – how they fared:
What moved the market?
- Fund managers finally decided to invest some cash before 30 June and the market hit a 10 year high!
- Telstra’s Strategy Day and profit downgrade.
- Australian Dollar fell to a one year low after news of the latest trade tremors.
Calls of the week:
- I said that the banks are a buy!
- Roger Montgomery named good and bad tech stocks in his article this week.
- Optus having to hand over its broadcasting of the World Cup to the SBS after they experienced technical difficulties.
The Week Ahead:
Australia
- Tuesday June 26 – Weekly consumer confidence
- Tuesday June 26 – Reserve Bank speech
- Wednesday June 27 – Engineering construction activity (March Quarter)
- Thursday June 28 – Finance & wealth (March quarter)
- Thursday June 28 – Job vacancies (May)
- Friday June 29 – Private sector credit (May)
Overseas
- Monday June 25 – US Chicago Fed National Activity Index (May)
- Tuesday June 26 – US Dallas Fed Manufacturing Index (June)
- Tuesday June 26 – US New home sales (May)
- Tuesday June 26 – US Home prices index (April)
- Wednesday June 27 – China Industrial profits (May)
- Wednesday June 27 – US Richmond Fed Manufacturing Index (June)
- Wednesday June 27 – US Consumer confidence (June)
- Wednesday June 27 – US Trade balance (May)
- Wednesday June 27 – US Durable goods orders (May)
- Thursday June 28 – US Economic growth (March Quarter)
- Friday June 29 – US Chicago purchasing managers index (June)
- Friday June 29 – US Personal spending/income (May)
- Saturday June 30 – China purchasing managers indexes (June)
Food for thought:
What can you catch but not throw?
(Email your answers to subscriber@switzer.com.au [12])
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.
Chart of the week:
Bank bill spread at two year high!
Top 5 most clicked:
- Is the banks’ crucifixion over? Who else thinks they’re a buy? [1] – Peter Switzer
- 3 stocks to take profits on in the new financial year – part 1 [3] – Tony Featherstone
- China: where growth and value collide [4] – Charlie Aitken
- 4 value buys for the next financial year [6] – James Dunn
- Tech stocks – the good and bad [5] – Roger Montgomery
Recent Switzer Super Reports:
Monday 18th June: A value proposition [13]
Thursday 21st June: Smashed avocado [14]
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.