Wall Street is having difficulty rising but it doesn’t have the ammo to blow itself up into a correction, with earnings season looking pretty good and offsetting the negatives out there, such as Mario Draghi’s comments about Europe, Donald Trump and the upcoming election only 17 days away.
Then there’s the unforgettable December interest rate rise, which still has a greater than 60% chance of happening. The expectations were a little higher last week but the rising US currency must have some Fed voting members arguing that a stronger currency is like a rate rise. Also, Janet Yellen’s ‘I might like a hotter economy’ speech, which means pursuing higher inflation, the rate rise could be delayed!
Meanwhile, according to The Earnings Scout organisation, which tracks companies’ reports, the really intriguing development since the start of earnings season has been the overall performance of US companies so far. As of Friday morning, 80% of the 116 companies that have reported had beaten what the expert analyst had tipped and 65% had topped on revenue expectations.
On the back of that, Wall Street should be more positive but the rising rig count in the US isn’t allowing oil prices to trend up. Remember, higher oil prices have been good for US stock market momentum but higher prices have meant higher cost US shale oil producers are starting to come back into business.
Also not helping US investor enthusiasm is the European Central Bank’s boss, Mario Draghi, who has talked the euro down and the greenback up by not publicly agreeing with market expectations that the central bank’s bond buying would soon be tapered. Mario has deferred all such talk until the December meeting.
Like the world’s hoard of investors, he would want to see who is the US president, what OPEC decides in November and what the Fed decides on interest rates. Mario would be keenly watching the actions of the ‘I like it hot’ lady, Janet Yellen. In fact, he probably thinks he has done his job when the euro falls and the US dollar rises, as it helps EU growth. And that’s his number one task.
Overnight, the greenback hit a seven-month high and, for those interested, the Oz dollar is down to 76.04 US cents. However, the real action has been against the euro, as this chart shows:
Mario would love this chart’s story as it shows he’s getting the currency dividend, as a falling euro is like an interest rate cut. And in a world of negative interest rates in Europe, that’s a big result.
In fact, this is a critical time in the global recovery. We need to see Europe grow faster in 2017 and the US has to prove it can pick up the pace of growth, while enduring slightly higher interest rates and a stronger greenback. This is what a normal, pre-GFC number one economy of the world is supposed to be able to do. If we can genuinely see Japan pick up next year and China continue to produce better than expected economic data, as we saw this week, then stocks can keep trending higher.
Without these scenarios, the doomsday merchants might have their overdue time in the rain. I can’t call it ‘time in the sun’ as they don’t have a sunny disposition!
Locally, the big four banks and resource stocks kept stock market action positive but healthcare and gambling stocks copped it.
The negatives outweighed the positives for the week and so the S&P/ASX 200 was down but it was an ignorable four points, with the index closing out at 5430.30.
The big four banks finished up, while BHP ended in the black, just, but Rio slipped. Banks and resource stocks have led the way recently and I suspect they will keep doing so into 2017. However there will be occasional obstacles along the road, such as those surprisingly weaker full-time employment numbers, which I’ll look at closer below and next week.
By the way, a stronger dollar always hurts commodity prices, as they are priced in US dollars, so the share prices of the likes of our big miners have been affected as a consequence.
The big news story on Friday was Healthscope, whose update to the market was not well-received, as the 19% dumping of its share price proves. I have always been suspicious of this sector, as some of its ‘star’ players can really hit the health of your wealth!
What I liked
- I didn’t like the employment result but I did like seeing the unemployment rate fall from 5.7% to 5.6% for purely psychological reasons.
- The NSW jobless rate at 4.9%, which is a 4 year low!
- The Commonwealth Bank Business Sales Indicator (BSI) – a measure of economy-wide spending – lifted by 0.7% in trend terms in September, which is the strongest gain in 17 months.
- The Chinese economy grew at a 6.7% annual pace in the September quarter, in line with forecasts and matched the 6.7% annual growth in the year to June.
- Chinese retail sales rose at a 10.7% annual rate in the year to September, the fastest pace in nine months. Industrial production was up by 6.1% over the year and investment (year to September) was up by 8.2%.
- The Australian Bureau of Statistics (ABS) reported that new vehicle sales rose by 2.5% in September. Over the year to September, a record 1,179,652 vehicles were sold. (I think we can trust these numbers.)
- The Tabcorp and Tatts merger deal, which has been good for Tatts’ stocks, which were up 15% or so for the week.
- Hillary maintaining her lead over Donald.
- The US leading index and industrial production numbers rose.
What I didn’t like
- Our dollar going over 77 US cents this week!
- The employment numbers, where full-time jobs fell by 53,000, while part-time jobs rose by 43,200. Economists had tipped a 15,000 increase!
- The question marks raised over the ABS – the Statistician should clarify its position on the job numbers.
- The spat between PM Turnbull and ex-PM Abbott – leadership dramas are not good for business and consumer confidence, as Kevin and Julia proved.
- The Crown/Macau arrests and the impact on the share prices of Crown and Star. China really has to grow up and smell the flowers of capitalism. Capitalism permits it to do exactly the same thing to attract so-called whale gamblers!
- Ten’s write down of its licence, which took the company’s share price down 17% on Thursday! The revenue story is on the rise and ratings have picked up, so shareholders were entitled to hope for some positive market news. This is not my kind of company but I do feel for those who have punted on some of the big names running this company.
Big week ahead
Wednesday brings the CPI for the September quarter and, if it’s on the too low side, there will be speculation about a Cup Day rate cut. CommSec’s Craig James tips an underlying rate of inflation of 0.5% and 1.7% for the year. Meantime, AMP’s Shane Oliver said this on the upcoming stat: “We have been allowing for another RBA rate cut in November but given recent solid economic data, evidence that the terms of trade and hence national income has bottomed and signs that the new RBA Governor would prefer not to cut rates again, underlying inflation would probably need to be 0.3% quarter on quarter or less to clearly bring on another rate cut in November.”
There’s also a truckload of economic data from the US, Europe and Japan. I want to see a good US economic growth number on Friday, so that will be a big story for next Saturday.
Top stocks – how they fared
[table “223” not found /]The week in review
- On the back of an article suggesting the banks could be affected by apartment oversupply, I explored whether you’d buy them on the dips, or wave them bye-bye [1]!
- Paul Rickard looked at the latest research on active vs passive fund managers and revealed six high-performing equity funds [2].
- Ingham’s [3] will soon list on the ASX – so will the stock rule the roost, or end up charcoaled? James Dunn discussed whether potential buyers should have confidence.
- The brokers [4] placed Medibank Private in the good books, while Oil Search and Santos were downgraded. In our second broker report [5], Sydney Airport was in the good books while Whitehaven was in the not-so-good books.
- Our expert stock pickers gave their hottest tips, with BHP Billiton and the banks [6] on the likes list.
- Charlie Aitken said he’s taken advantage of pullbacks in three stocks he’s bullish [7] on for the medium-term – Star Entertainment Group (SGR), Link Administration (LNK) and Regis Resources (RRL).
- Tony Featherstone [8] explained why emerging-market equities are back in focus and how to gain a sensible amount of exposure.
- Tony Negline helped you make sense of changes to the non-concessional contributions cap and the three-year bring forward rule [9].
What moved the market?
- A rise in oil prices on the back of a fall in weekly US inventory data.
- China’s GDP data, which showed that the economy grew 6.7% in the third quarter compared to a year earlier.
- Solid earnings reports in the US.
- And news that 18 employees of casinos operator Crown Resorts were detained in China.
Calls of the week
- Tatts and Tabcorp announced they’d be merging to create an $11bn gaming giant.
- When Donald Trump was asked about whether he’d accept the result of the election at the third presidential debate he said: “I will look at it the time … I’ll keep you in suspense”.
- The European Central Bank (ECB) kept its key interest rates and bond-buying stimulus program unchanged.
- And Charlie Aitken bought the dips in three high-quality companies. Find out more [7].
The week ahead
Australia
- Monday October 24 – State of the States (October)
- Wednesday October 26 – Consumer price index (September quarter)
- Thursday October 27 – Import and export prices (September quarter)
- Thursday October 27 – Detailed employment data (September)
- Friday October 28 – Producer price indexes (September quarter)
- Friday October 28 – New home sales (September)
Overseas
- Monday October 24 – US, Europe and Japan “Flash” manufacturing
- Tuesday October 25 – US Home prices (August)
- Tuesday October 25 – US Consumer confidence (October)
- Tuesday October 25 – US Richmond Federal Reserve index (October)
- Wednesday October 26 – US Advance trade (September)
- Wednesday October 26 – US New home sales (September)
- Thursday October 27 – US Durable goods (September)
- Thursday October 27 – US Pending home sales (September)
- Friday October 28 – US Economic growth (September quarter)
- Friday October 28 – US Employment costs (September quarter)
Food for thought
You jump off a cliff and you assemble an airplane on the way down —Reid Hoffman, LinkedIn co-founder
Last week’s TV roundup
- Lance Lai [10] of Accountancy Invest explains what the charts are saying about the pound, the markets and more. Don’t miss it!
- Markets have been mixed on the back of election uncertainty and an inevitable rate hike in the US. To share his views, Charlie Aitken [11] of Aitken Investment Management joins the show.
- To discuss global financial markets and how he’s investing right now, Sebastian Evans [12] from Naos Asset Management joins Super TV.
- And Shane Oliver [13] of AMP Capital explained how worried we should be about the latest jobs numbers.
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 also shows how this has changed compared to the week before.
This week, the biggest mover was Aconex, with a 1.07 percentage point increase in the proportion of shares sold short to 8.05%. Cover-More Group went the other way, with a decrease in the amount of shares sold short from 10.34% to 8.67%.
Source: ASIC
Charts of the week
Can Hillary Clinton take our market to 5,500 or higher?
On Switzer TV, our king of charts Lance Lai gave his take on the ASX200. Last time [14] on the show, he said we’d get a steady up, and we did. And now [10] he thinks we’re having a rest, but once those curveball elections get out of the way, we could reach T3 – that’s 5,556!
Does the economy have its mojo back?
The Commonwealth Bank Business Sales Indicator is a measure of economy wide spending, and the results have picked up! It rose by 0.7% in September (trend terms) – matching the strongest gain in seventeen months! Are retailers in for a treat this Christmas?
Top five most clicked stories
- Peter Switzer: Are the banks a buy or should you wave them bye-bye? [1]
- Charlie Aitken: Buying the dip in Star, Link and Regis Resources [7]
- Paul Rickard: Active vs. Passive and six high performing equity funds [2]
- James Dunn: Will Ingham’s rule the roost? [3]
- Staff Reporter: Hot stocks tips – BHP Billiton and the banks [6]
Recent Switzer Super Reports
- Thursday 20 October: Buying the dips [15]
- Monday 17 October: Banks a buy or bye-bye? [16]
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.