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- Sydney, Friday 16th August [1]
- Melbourne, Tuesday 20th August [2]
- Brisbane, Wednesday 21st August [3]
It’s 5am and there’s no word on where President Donald Trump and China’s Xi Jinping stand on their trade deal negotiations. But cautious optimism prevails, with US stock markets in the green. Meanwhile, European markets were strongly positive on the notion that a truce in the trade war is likely.
That’s not to say a deal will be had, in fact a CNBC survey came out with the following headline: “Here’s what every major Wall Street bank believes will happen at the Trump-Xi meeting.”
The conclusion?
“Wall Street strategists think a ceasefire is the most likely outcome…”
This means the additional tariffs slammed on the $US300 billion worth of Chinese goods currently not slugged could be taken off the table. That’s a positive step but it doesn’t do enough to turn around the more negative outlooks for the US and global economies, and our economy.
“The ceasefire could include a commitment to not escalate trade and technology/investment-related tensions further, with the main structural issues being left unresolved,” Citi said. “Still, the China-containment strategy would likely follow, and the damage on the real economy from the tariffs-limbo is ongoing.” (CNBC)
This week’s market trade here and abroad was neatly summed up by CommSec’s Craig James mid-week. “Investors were reluctant to push stocks too far ahead of the G20 meeting over the weekend, especially with mixed news about progress of US-China trade talks,” he wrote.
Meanwhile, the US Federal Reserve chair, Jerome Powell, hosed down some of the “Fed will soon cut” euphoria, when he told us that “the Fed will act as appropriate to sustain the economic expansion.”
He basically inferred that Donald and his trade war will be pivotal to what happens to interest rates. “The question is whether global ‘uncertainties will continue to weigh on the outlook and thus call for additional policy accommodation’,” James reported on Powell.
As I’ve said overnight, US stocks were just in the green and it’s understandable with hopes on Trump and lower interest rates and the best first-half for stock prices in 20 years!
Given the importance of this Trump-Xi meeting, you can expect pronounced market action next week.
“There’s a pretty healthy premium built into short-term options,” said James Masserio, head of equity derivatives trading of the Americas at Societe Generale. “Part of that premium is this 50-50 coin flip where you could get something that’s a surprise step in the right direction or you come out with a whole bunch of nothing. Either way, the market is going to pick a short-term direction after the G20.”
From a local perspective, our stock market was so cautious about the G20 showdown on trade that our S&P/ASX 200 Index was down 32 points (or 0.5%) for the week to end at 6618.8 on Friday.
Like the Yanks, we’ve had the best start to the year since 1992 (that’s 27 years!) and we’re now only 210 point (or 3%) off our all-time high of 6828.7. And be clear on this: what Trump and Xi decide will determine when we beat that old level. Their trade talks will also have a big bearing on the course of interest rates, with both the Fed and the RBA willing to cut rates but their respective bosses would prefer not to.
I think we’ll see a rate cut next Tuesday but if a trade deal is sealed sooner rather than later, then Dr Phil Lowe could easily disappoint those economists who have the cash rate at 0.75% or even 0.5%.
Stocks wise, Metcash dropped 18.4% for the week on a poor outlook for its hardware operations. This company has problems, as it fights the likes of Bunnings, Coles, Woolies and Aldi and with other rivals on the way!
Good news for Anton Tagliaferro of Investors Mutual, who was on my TV show on Monday and told me he was sticking to his Pact call, where the listed company put on 18.2% for the week via a new debt deal.
Away from the trade war worries, the story of the week was the fact that this latest leg up for equity markets has been driven by my beloved yield stocks. And Ausbil’s Paul Xiradis thinks this phase of the market isn’t over yet: “Markets will be driven by the data, it’s likely we’ll see the Fed cut rates, it’s likely we’ll see rate cuts here [in Australia] and more QE discussion in Europe,” he said. “If interest rates remain low, with a downward bias and potential for more easing, then long duration rate-sensitive assets such as REITs [real estate investment trusts], infrastructure and utilities should be well supported, and could go higher.” (AFR)
What I liked
- Private sector credit (effectively outstanding loans) rose by 0.2% in May (consensus: +0.2%).
- The Federal Budget is effectively balanced. In the 12 months to May 2019, the Budget deficit stood at $148 million (less than 0.1% of GDP).
- Total household wealth (net worth) rose by 0.2% to $10,242.6 billion in the March quarter, after falling by 2.1% to $10,225.9 billion in the December quarter. The record-high figure for household wealth was $10,422.3 billion in the September quarter 2018. Over the year to March, net worth fell by 0.7%. But this is an improving sign.
- The weekly ANZ-Roy Morgan consumer confidence rating rose by 0.1% to 114.3 points – the first increase in four weeks. Consumer sentiment is marginally below the average of 114.4 points held since 2014 but remains above the longer term average of 113.1 points since 1990. (The measure on whether it was a ‘good time to buy a major household item’ rose by 7.8 points – the biggest weekly lift in 31 weeks – hitting an 11-month high of +36 points.)
- Foreigners held $604.8 billion Aussie listed shares in the March quarter, up from $548.1 billion in December. This means foreigners held 31.3% of total listed shares (near 4-year highs) but slightly below the 31.6% average since the global financial crisis and long-term average of 32.8%.
- Excluding the resource sector (coal, oil, pipelines etc.), engineering construction work yet to be done stood at a record high of $47 billion in the March quarter. A record $36.6 billion of engineering work is yet to be done in NSW and Victoria.
- The US economy grew at a 3.1% annual rate in the March quarter, in line with forecasts.
- Reuters reported that shares in H&M rose by 13.7% after the Swedish fashion retailer said sales of its summer collections got off to a good start and that it was selling more clothes at full price.
- The S&P/Case Shiller home price index in the US rose by 0.8% in April (forecast +0.6%) to be up 2.5% on the year. The FHFA house price index rose by 0.4% in April (forecast +0.2%).
- The Markit flash manufacturing index eased from 50.5 to 50.1 in June (forecast 50.4), with services down from 50.9 to 50.7 (forecast 51). Anything over 50 means the sector is expanding. Considering other negative data, this is OK.
What I didn’t like
- The Oz dollar went over 70 US cents over the course of the week. A lower dollar is better for growth and jobs. It’s 70.2 US cents right now.
- Credit card lending fell by a record 5% in the year to May and is at an 8½-year low.
- Lending growth for housing is the slowest since records began in 1976 but these are pre-June when rates were cut.
- Engineering construction work done fell for the third straight quarter, easing by 4.9% in real (inflation-adjusted) terms in the March quarter. And work done is down 13.5% on a year ago.
- US durable goods orders fell by 1.3% (survey: -0.3%) in May.
- US Consumer confidence fell from 131.3 to 121.5 in June (forecast 131.1).
- US new home sales fell by 3.7% to a 626,000 annual rate in May (forecast 680,000).
- The Richmond Federal Reserve manufacturing index in the US eased from +5 points to +3 points in June (forecast +7 points).
- President Trump announced over last weekend that the US will impose major new sanctions on Iran on Monday, which is a negative for confidence but helps the gold price.
Why Donald impresses himself
The US President tweeted from Japan overnight: “The stock market went up massively from the day after I won the election, all the way up to the day I took office, because of the enthusiasm for the fact that I was going to be President. That big stock market increase must be credited to me. If Hillary won – a Big Crash!”
The Dow Jones’ close was the biggest June close since, wait for it, 1938! I can’t seriously see him undo such success and crowing about himself by allowing his trade war to bring on a recession and a stock market collapse.
Not even Donald could spin himself out of something like that!
The week in review:
- This week in the Report, I wrote that anyone not needing to shoot the lights out with their investments should have a reasonable exposure to stocks. Given the terrible term deposit rates, a 50/50 or even a 60/40 exposure for stocks to other assets might be justified [4], as long as you can sleep if your capital drops by 30% in a huge stock market crash.
- While Link Administration Holdings (LNK) has been knocked down recently, here is Paul Rickard’s view [5] on if it can get up again and whether you should add more Link shares to your portfolio.
- I also looked at how the course of interest rates [6] could be confirmed or changed with Donald Trump/ Xi Jinping’s catch up at the G-20 Summit in Osaka, Japan this week.
- As this financial year comes to a close, James Dunn looked at five stocks [7] that you might consider tossing out of your portfolio.
- Either analysts are too positive on ALS and need to lower their earnings forecasts, or the market is too bearish and overlooking the link between a rallying gold price and ALS. Here’s why Tony Featherstone favours the latter scenario [8].
- Graeme Colley put together a list [9] of things to keep your eagle eye on and make sure your SMSF records are in good condition to keep the fund auditor and the ATO happy, if they want to take a look.
- This week’s Hot Stock [10] from Michael McCarthy, CMC Markets’ Chief Market Strategist, was BHP.
- There was an equal number of upgrades and downgrades in the first Buy, Hold, Sell – What the Brokers Say [11] with 7 of each, and in the second edition [12], upgrades by stockbrokers slightly outnumbered downgrades.
- In Questions of the Week [13], Paul Rickard answered readers queries about whether Blackmores is a buy, if fixed interest is “safer” than shares and how SMSFs are taxed in the year you retire.
Top Stocks – how they fared:
The Week Ahead:
Australia
Monday July 1 – Purchasing managers index manufacturing (June)
Monday July 1 – CoreLogic home prices (June)
Tuesday July 2 – Reserve Bank Board meeting
Wednesday July 3 – Building approvals (May)
Wednesday July 3 – International trade (May)
Wednesday July 3 – Purchasing managers index services (June)
Thursday July 4 – Job vacancies (May)
Thursday July 4 – Retail trade (May)
Overseas
Sunday June 30 – China Purchasing managers indexes (June)
Monday July 1 – China Caixin manufacturing gauge (June)
Monday July 1 – US ISM manufacturing index (June)
Tuesday July 2 – US Total vehicle sales (June)
Wednesday July 3 – China Caixin services gauge (June)
Wednesday July 3 – US ADP private sector employment (June)
Wednesday July 3 – US International trade (May)
Wednesday July 3 – US Factory orders (May)
Wednesday July 3 – US ISM services (May)
Wednesday July 3 – US Challenger job cuts (June)
Thursday July 4 – US Public holiday (Independence Day)
Friday July 5 – US Non-farm (employment) payrolls (June)
Food for thought:
“Consistent savings and boring profits make for adventurous living and exciting opportunities.” – Jim Brown
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:
Foreign ownership of Australian listed shares was at 31.3% in the March quarter according to the Australian Bureau of Statistics, close to a four-year high but below the long-term average of 32.8% as highlighted by CommSec Senior Economist Ryan Felsman:
Source: ABS, CommSec
Top 5 most clicked:
- Do you need an alternative strategy to term deposits? Could it be stocks? [4] – Peter Switzer
- Cleaning up your portfolio before June 30 [7] – James Dunn
- Should you buy more Link shares? [5] – Paul Rickard
- Buy, Hold, Sell – What the Brokers Say [11] – Rudi Filapek-Vandyck
- My “HOT” Stock – I like BHP [10] – Maureen Jordan
Recent Switzer Reports:
Monday 24 June: Should you consider moving from term deposits to shares? [14]
Thursday 27 June: Five days that could change the interest rate world [15]
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.