Switzer on Saturday

Living with Donald can be trying!

Founder and Publisher of the Switzer Report
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As one headwind changes with the arrival of election day, I’m hoping that if we do see a PM Bill Shorten tonight that his acceptance speech will be as well-received as Donald Trump’s was in November 2016, which set the market alight. But heck, that’s a Christmas wish of an optimist.

Of course, if Scott Morrison does a Steven Bradbury and takes out the big prize, I bet stocks would soar on Monday. But they’d still have to deal with the spectre of the most unusual US President ever – and he’s up against a lot of competition!

This week’s trade has been Trump-dominated with his anti-China antics/tweets on trade, driving our stock market down on Monday. But as the chart shows, we had four days of rises.

Source: au.finance.yahoo.com

After a bad start, the S&P/ASX 200 Index rose 54.4 points (or 0.9%) to 6365.3 over the week and we even saw an 11-year high on Friday. But we couldn’t hold it. And while local issues like the election, our dollar now at 68.67 US cents and the iron ore inventories in China influenced our market, the all-pervading potential impact of a ‘deal or no deal’ with Donald and President Xi Jinping is still the biggest market influence.

“I suspect we’re seeing a bit of overreaction because markets are finding it difficult not only to price the risks of a full blown trade war occurring, but also the economic and profit impact of a trade war,” said Alex Wolf, J.P. Morgan Private Bank’s head of client investment strategy for Asia. “In short, the market is attempting to price probabilities of negative outcomes, but also the tangible impact of those potential negative outcomes, all of which there is no precedent or clear model for. This is likely leading to the gyrations we’re witnessing around trade news.” (SMH)

Overnight, “US sources” were fuelling reports that trade talks had stalled, which was in conflict with what the Treasury Secretary, Steve Mnuchin, was saying earlier in the week. Not surprisingly, Wall Street was in whipsaw mode, with the Dow down over 200 points at one stage. And while the China news was a negative for stocks, the opposite was the case with the news via the President that a deal had been struck to remove steel and aluminium tariffs on Canada and Mexico.

Not helping market matters was the Trump administration, putting Chinese telecommunications company Huawei and its affiliates on a business blacklist, banning it from the supply chain. These aggressive actions had been dropped earlier in the trade talks to help make a deal. But clearly the level of argy-bargy has been ramped up and the market won’t like that and explains why the Dow finished down 98 points overnight.

Meanwhile, another surprise for stock players is the money market futures guess on US interest rates. CNBC says that 74% of the professionals who speculate on rates are “highly confident of a cut in December”!

Against this, and explaining why playing stocks remains challenging, is this from the Morgan Stanley team, who expect “the Fed to remain on hold until the back half of 2020, delivering hikes in September and December”.

Why the difference? Try these reasons:

  • Trump and China.
  • Trump and economic growth.
  • Trump and his impact on inflation.

If this trade war ends up in a US recession, stocks will go into a bear market, jobs will go, wages will fall and inflation will start heading towards deflation.

This trade war is a big deal!

On Monday, shares in Apple lost 5.8%, Boeing fell by 4.9%, Uber Technologies lost another 10.75% and the Dow Jones ended lower by 617 points (or 2.4%), after being down 719 points in afternoon trade. The S&P500 index fell by 2.4% and the Nasdaq index lost 270 points (or 3.4%). And most of this was down to the Trump-trade impasse and the US lifting the 10% tariff on US$200 billion worth of Chinese imports to 25%.

So China returned fire, imposing higher tariffs on US$60 billion worth of US imports.

But showing how market sensitive this trade war stuff is, stocks spiked when Donald tweeted: “When the time is right, we will make a deal with China…It will all happen, and much faster than people think!”

Living and investing with Donald isn’t easy.

It was a good stock week for our big miners, with BHP up 4.5% to $38.46, Rio 6.4% higher at $101.35 and Fortescue surging 18.7% to $8.95.

Banks had a shocker for the week. ANZ lost 6%, NAB 7.8%, Westpac 6.6%, as they all traded ex-dividend. Meanwhile, CBA’s quarterly earnings update on Monday disappointed and it lost about 3%.

And for those who don’t hold CSL and have always kicked themselves for it, “UBS lifted its price target on the healthcare giant following an analysis of its competitors, suppliers and partners’ first quarter financial results. Its shares closed the week 4.7 per cent higher at $206.51.” (SMH) Its target price on CSL has been pumped up from $207.50 to $223.

What I liked

  • Employment rose for the ninth straight month, up by 28,400 in April, after a revised 27,700 increase in jobs in March (previously reported as a 25,700 increase in jobs). Full-time jobs fell by 6,300 but part-time jobs rose by 34,700. Economists had tipped an increase in total jobs of around 15,000!
  • Unemployment rose from 5.1% to 5.2% in seasonally-adjusted terms. In trend terms, the jobless rate was steady at 5.1% but the rise in the jobless rate links to the rise in the participation rate, which went from 65.7% to a record high of 65.8%. In trend terms, the 65.7% participation rate remained at record highs.
  • The wage price index rose by 0.5% in the March quarter, following a similar increase in the December quarter. Annual wages growth was unchanged at 2.3%. Private and public sector wages were up 2.4% on the year, with the rise for private wages the fastest in four years.
  • The Westpac/Melbourne Institute survey of consumer sentiment index rose by 0.6% to 101.3 in May. The sentiment index is near its long-term average of 101.5. It was an OK rise but not a great one.
  • The NFIB business optimism index – a small business confidence indicator – in the US rose from 102.3 to 103.5 in April (forecast 102.3).
  • US housing starts rose by 5.7% to a 1.235 million annual rate in April (forecast 1.205 million).
  • The Philadelphia Federal Reserve manufacturing index rose from +8.5 to +16.6 in May (forecast +9).
  • Walmart shares rose more than 3% by Thursday, after beating profit expectations, with e-commerce revenues during the quarter growing by 37%.
  • The Empire State manufacturing index in the US rose from +10.1 to +17.8 in May (forecast +8.5). The NAHB housing market index rose from +63 to +66 in May (forecast +64).
  • European stocks rose on Wednesday on expectations that US President Trump would delay a decision on auto tariffs by up to six months.
  • US Treasury Secretary Mnuchin said that he expects trade talks with China to resume soon.

What I didn’t like

  • The NAB business conditions index fell from +7.2 points in March to +3.1 points in April, below the long-term average of +5.8 points. But the business confidence index rose from 5½-year lows of -0.6 points in March to -0.3 points in April – below the long-term average of +5.8 points. It really was only a “better” bad result! I hope this is only a pre-election effect.
  • The employment sub-index in the NAB Business Survey fell to a 3½-year low of -1.2 points in April, down from +6.2 points in March and below the long-term average of +2 points.
  • The value of owner-occupier home loans fell 3.4% in March, with investment loans down 2.7%. In seasonally-adjusted terms, the share of first home buyers in the home lending market hit 6½-year highs of 27.8% in March.
  • In China,motor vehicle sales in April were down by 14.6% on a year earlier, after a 5.2% annual decline in the year to March.
  • Chinese retail sales rose at a 7.2% annual rate in the year to April (forecast: +8.6%) – the slowest pace of growth since May 2003. Sales were down from an 8.7% annual rate in the year to March.
  • Chinese industrial production rose at a 5.4% annual rate in April, below the forecast average (+6.5%). Production had risen by 8.5% in the year to March.
  • US retail sales fell by 0.2% in April (forecast +0.2%). Excluding autos, sales rose by 0.1% (forecast +0.7%). Industrial production fell 0.5% in April (forecast: flat).

Monday’s reaction to today’s poll

The market reaction to who wins today’s election should be interesting to see but unfortunately we might have to wait for the real reaction. Apart from the early voting effect, which experts tell us will delay counting (how does that happen?), I think the Senate’s make-up is going to have a huge effect on what policies see the light of day. If we have a PM Bill Shorten on Monday, he might eventually see a Senate that tells him to put a cap on retirees’ tax refunds from franking credits and they could tell him that changing negative gearing, with house prices falling, isn’t a smart idea.

That said, I don’t think they’d stop him from halving the capital gains tax discount, which is a huge issue that could create a Bill ‘short-term’ boom for property and shares until January 1 next year.

What happens after that doesn’t bear thinking about!

I hope Bill doesn’t become another Donald in our life that makes it hard to self-fund a retirement!

The week in review:

Top Stocks – how they fared:

What moved the market?

  • China announced it is planning to raise tariffs on US$60 billion worth of US goods to as high as 25% from 5-10%.
  • Rising oil and iron ore prices helped to boost energy and mining stocks.

The Week Ahead:

Australia
Tuesday May 21 – CBA Business Sales Index (April)
Tuesday May 21 – Reserve Bank Board minutes
Tuesday May 21 – Speech by Reserve Bank official
Tuesday May 21 – ANZ-Roy Morgan consumer confidence
Wednesday May 22 – Skilled job vacancies (April)
Wednesday May 22 – Construction work done (March quarter)
Thursday May 23 – CBA ‘flash’ purchasing managers indexes (May)

Overseas
Monday May 20 – US Chicago Fed National Activity Index (April)
Monday May 20 – US Federal Reserve Chair Powell speech
Tuesday May 21 – US Existing home sales (April)
Wednesday May 22 – US Federal Reserve meeting minutes
Thursday May 23 – US New home sales (April)
Thursday May 23 – US Kansas Fed Manufacturing Activity (May)
Thursday May 23Markit ‘flash’ purchasing manager indexes (May)
May 23-26 – European Parliament elections
Friday May 24 – US Durable goods orders (April)

Food for thought: 

“The stock market is filled with individuals who know the price of everything, but the value of nothing.” – Phillip Fisher 

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:

Shane Oliver wrote this week that, if all of the US’s planned tariff increases on Chinese goods are implemented, the average US tariff rate on imports would rise to about 7.5%:

Source: World Bank, Deutsche Bank Research

Top 5 most clicked:

Recent Switzer Reports:

Monday 13 May: Donald’s trade war bluff

Thursday 16 May: Volatility is the name of the game

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.