The local euphoria from a Scomo win on Saturday night, which fired up the stock market, was slightly hosed down by Wall Street’s troubled relationship with one Donald Trump. His on again off again ‘love affair’ with China’s leadership as he negotiates a trade deal has brought the US stock market’s Dow Jones Index down for the fifth week in a row!
CNBC says this hasn’t happened since 2011 and it seemed to get serious yesterday, when the lead stories in every US media outlet were that a trade deal mightn’t show up for a long time, if ever! That wasn’t easy to digest for a market that has cut Donald a lot of slack as he tries to get even with a China that has been taking the US for a trade ride for a long time.
A New York hedge fund manager, who I had breakfast with on Monday, surprised me when he said Donald has a lot of support for his stance on tariffs on Chinese goods entering the US. I asked: “On Main Street or Wall Street?” And he replied: “Both!”
That surprised me. Clearly, this week’s reaction says Americans market players agree with the impact of tariffs on China’s unfair trade plays but they still want a trade deal. The uncertainty of when a trade deal will show up, which should advantage the US is one thing, but no deal and a full blown trade war is another. And that’s not wanted.
Yesterday, when we learnt a deal might not eventuate and another $US300 billion worth of Chinese goods could cop tariffs, Wall Street recoiled, with the Dow down over 400 points at one stage. That’s when the President thought the negativity was getting way overdone so he let the market know that the current “trade war could be over quickly.”
This has underpinned the positive reaction on US stock exchanges on Friday but who knows what comes down the road next week? One thing is clear and that’s the fact that the Chinese don’t like Donald’s bullyboy tactics and they especially don’t like it being played out in the public arena in which the US President loves to grandstand.
Putting pressure on the White House was the latest manufacturing read, which was at a nine-year low as exports slow and inventories stockpile up. That has to explain why Donald had to inform the market that this trade war could be over soon. Like a TV scriptwriter tapping out a drama, he holds back the timing of the climax. And he’s playing with us, giving us false hope that a satisfying end is near. Let’s hope this isn’t a drama that rolls into another season, with the climax still not in sight!
The trade concerns became so intense this week that crude oil prices dropped 7% over the week and it explains why our dollar lost its post-election pick up, though the RBA Governor’s strong tip about a cut on Tuesday week helped take the dollar down. Dr Phil Lowe wants a lower dollar to make sure you take your wallet if you intend holidaying in the US this year.
You have to love this ‘oh so American take’ on what’s going on with markets caught in Donald’s drama. “The growing worries around a US/China elongated trade battle and its implications on the tech space are heavily weighing on the minds of both investors and the companies themselves caught in the cross hairs,” Dan Ives, analyst at Wedbush Securities, wrote in a note to clients. “The ‘poster child’ for the US/China trade wars continues to be Apple with the stock under heavy pressure as many competitors are yelling fire in a crowded theater around the potential China impact to Cupertino if this situation worsens.”
Cupertino? Cupertino is famous as the home of high-tech giant Apple Inc.
Heading back home and until Donald did what Donald does, we were at an 11-year high on the S&P/ASX 200 Index, which prompted CMC Market’s Michael McCarthy to tell me on my Switzer Show podcast that he thinks our market is close to a breakout to the upside and he has the index’s all-time high of just over 6820 in his sights.
And I was rooting for his call when my SWTZ stock hit $2.59 this week. So was Andre my video guy, who listens to all the interviews he films and who bought into the stock market for the first time with SWTZ at $2.27 a few months back. He loves his boss at the moment but Donald could mess with that, if he can’t cut a deal soon.
Over the week, the S&P/ASX 200 Index was up 90.7 points (or 1.4%) but it should’ve been more. That said, the rebound of the banks was the huge news and it reflected the belief that a Morrison Government will do less persecution of banks over three years compared to what Bill was likely to do. Westpac put on a huge 10.7%, while the other Big Four added around 7%, which was a nice week’s work. We can thank the voters of Australia for that and the fact that the franking credits nightmare is over. And I bet you won’t hear Labor’s expected next leader, Albo, ever uttering those two words in his political lifetime!
One sector that thinks Morrison means good news was housing and construction. “Building products producer CSR added 20 per cent to end the week’s trade at $4.14, Boral climbed 11.5 per cent to $5.23, GWA Group advanced 15.8 per cent to $3.60, Adelaide Brighton closed 13.4 per cent higher at $4.24 and developer Stockland rose 13.2 per cent to $4.45,” the SMH reminded us.
Meanwhile, retailers saw some blue sky at last, with Harvey Norman up 9.4% and JB Hi-Fi rising 8.7%.
Disappointment of the week was Technology One, which lost 22.9% after announcing worse than expected results. I’ll be looking into this stock to see if it’s a buying opportunity but that’s for another day.
Given that Scomo is back and Bill’s investor-threatening policies are gone, one theme to think about is that the RBA will cut rates on Tuesday week. Westpac’s Bill Evans now tips that the cash rate will head from 1.5% to 0.75% by Cup Day. If this happens, lower-dollar-sensitive stocks should benefit.
At last there seems to be a lot of ‘stuff’ supporting McCarthy’s breakout call. First up, there’s Scomo’s win. Second, certain sectors have spiked on the election news. Third, there’s the RBA’s impact on the dollar. Fourth, even AMP Capital’s Shane Oliver this week was seeing the bottoming process for house prices starting to show.
All we need now is a trade deal – go Donald!
What I liked
- The election result and the market’s reaction – two big shocks that came out of the blue.
- This from the Westpac/St. George economics team: “We are also now expecting the RBA to cut the cash rate in November, taking the number of times the RBA cuts this year to three and the cash rate to 0.75%.”
- The weekly ANZ consumer confidence reading popped up 2.1% to 117.2, which looks good, given the average is 114.4 in recent times.
- The CBA’s Business Sales Indicator rose 0.5% in trend terms over April and is above the long-term trend level of 0.4%. The election didn’t hit the measure too hard. 15 out of 19 sectors saw rises in sales, which is a good sign.
- The Budget in the 12 months to April was balanced, give or take a measly $33 million.
- Construction work in NSW, SA and Tasmania were at record highs over the year but recent trends have been less encouraging.
- The Fed’s latest Minutes say that it remains “patient” on interest rates.
- The White House gave some ground to Huawei allowing it to buy US goods for a limited time.
What I didn’t like
- The Skilled Jobs Vacancy Index is 5.9% lower than a year ago and is at its lowest growth rate since December 2013.
- Construction work done fell 1.9% in the March quarter after falling 2.1% in the December quarter.
- The US flash PMI for manufacturing fell 2 points to 50.6. 52.6 was expected.
- The Services PMI was 50.9 versus 53.5, which was expected.
- Donald’s trade talk held back stocks all week worldwide showing no stock market can be free of Mr. Trump and Wall Street.
- Not even thinking about backing the Coalition, which got out to 8/1! Paul Rickard took 5/1, which shows how politically astute he is!
Try this Donald
China’s trade spokesman is Gao Feng and this was his advice to Donald: “If the United States wants to continue trade talks, they should show sincerity and correct wrong actions. Negotiations can only continue on the basis of equality and mutual respect.”
Let’s hope Donald can go long respect.
Go Respect!
The week in review:
- On Monday [1], the positive effects of the election result were beaten to the punch by a stock market that instantly added 4% to CBA, 67 points on the All Ords and so on.
- If you think you’d like to invest in foreign stocks at a time when the low Aussie dollar makes it tricky, this article might give you some clues [2].
- The 5 great income stocks Paul Rickard put forward in February this year have done remarkably well. However, he thinks equity income stocks have become quite expensive and is increasingly considering opportunities in other asset classes [3].
- With the major banks’ half-year reports all lodged, the extent of the troubles in the industry are clear. Or are they? This week, James Dunn looked at what’s happening inside the Big 4 banks [4].
- Morrison’s “miracle” last Saturday has provided a tailwind for private-hospital operator Ramsay Health Care. RHC is Tony Featherstone’s preferred healthcare stock, and here’s why [5].
- Michael McCarthy from CMC Markets chose all four major banks, with a leaning towards ANZ and CBA, as Hot Stocks [6] this week.
- There were only 7 upgrades compared to 22 downgrades in the first Buy, Hold, Sell – What the Brokers Say [7] of the week, while an equal number of companies were upgraded and downgraded in the second edition [8].
- In Questions of the Week [9], Paul Rickard answered readers queries about Platinum Asset Management, companies franking dividends and our model portfolios.
Top Stocks – how they fared:
What moved the market?
- The Coalition’s victory in the Federal election saw a $33 billion surge to the sharemarket on Monday.
- Uncertainty over the trade war between the United States and China grew, with a resolution in the near future looking increasingly unlikely.
The Week Ahead:
Australia
Tuesday May 28 – ANZ-Roy Morgan consumer confidence
Thursday May 30 – Business investment (March quarter)
Thursday May 30 – Building approvals (April)
Friday May 31 – Private sector credit (April)
Friday May 31 – Credit card lending (April)
Overseas
Monday May 27 – China Industrial profits (April)
Monday May 27 – US Memorial Day public holiday
Tuesday May 28 – US S&P/Case Shiller home prices (March)
Tuesday May 28 – US Consumer confidence (May)
Tuesday May 28 – US Dallas Fed Manufacturing Index (May)
Wednesday May 29 – US Richmond Fed Manufacturing Index (May)
Thursday May 30 – US Economic growth (March quarter)
Thursday May 30 – US Goods trade balance (April)
Thursday May 30 – US Pending home sales (April)
Friday May 31 – US Personal income/spending (April)
Friday May 31 – China purchasing managers indexes (May)
Food for thought:
“The individual investor should act consistently as an investor and not as a speculator.” – Ben Graham
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:
With the Reserve Bank indicating that it will consider lowering interest rates at its next meeting in response to concerns over unemployment and inflation, CommSec published the following chart looking at forecasts for both:
Source: ABS, RBA
Top 5 most clicked:
- This election result has to be good for stocks [1] – Peter Switzer
- If you would like foreign stock exposure, read this [2] – Peter Switzer
- Is NBI another income star? [3] – Paul Rickard
- Buy, Hold, Sell – What the Brokers Say [7] – Rudi Filapek-Vandyck
- My “HOT” stocks – I like the Big 4 banks [6] – Maureen Jordan
Recent Switzer Reports:
Monday 20 May: Election miracle, another income star and the Big 4 banks [10]
Thursday 23 May: Morrison’s miracle [11]
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.