Janet Yellen proved to be the Wall Street wonder woman this week but she had some competition on Friday, when JPMorgan Chase, Citigroup and Wells Fargo all stumped up better-than-expected profits. In case you missed it, the Federal Reserve chair, Yellen (who I reckon is the most important woman in the world, aside from your beloveds out there) said that “monetary policy wasn’t set in stone” and the Fed would assess the low inflation readings of recent months. Further, she emphasized that the gradual pace of stimulus reduction remained appropriate.
Effectively, she downplayed prospects for near-term rate hikes, instead signing up for a gradual approach to ensure economic expansion and the return of inflation to the Fed’s 2% goal.
As CommSec’s Craig James importantly underlined: “Further, Yellen said the federal funds rate won’t have to rise much further to reach the “neutral level”. Yellen also noted that the Fed will start to reduce its portfolio of more than $4 trillion in securities this year.”
Her testimony to Congress was pivotal to the turnaround in market sentiment and explained why we finished the week with two solid up days for stocks.
The S&P/ASX 200 Index closed up 0.5% on Friday and up 1.1% for the week to close at 5765.1. Once again, those who seemingly didn’t like our banks have fallen back in love with the big four pillars of our key market measuring Index – ah, the fickle finger of finance.
This was pretty good timing, as some of the big names of US banks, as I said earlier, saluted the judge with runaway better profits. This gave Wall Street good reason to bet that the current earnings season will be a ripper. Not surprisingly, the Dow was up over 100 points (it finished up 85 though still in record territory) and the S&P 500 beat its previous all-time high of 2453.82, set on June 19.
Janet plus the banks’ profit show-and-tells have taken US stocks back into record territory. It will be hard for our market to have a wimpy Monday, where stocks hardly move, awaiting a Wall Street lead.
Yellen’s remarks took the negative winds out of stocks provided by the bond market, which overreacted to some central bank comments a few weeks ago that saw bond yields go too high and, in turn, threaten shares. My Monday report inferred just that and so I’m glad that Janet didn’t make a ‘monkey’ out of me!
Love your work Janet and I reckon even Donald is warming to you as well!
Back home and the news out of the US this week gives us a chance to threaten the range bound trading we’ve seen for the past seven weeks. And if our August reporting season conforms to what I see as a more positive view on the upcoming earnings reports of our key companies, then we could break out of this range of 5760 to something under that pain-in-the-neck 6000 level!
There was some other good news this week for stocks, with the oil price sneaking up to support energy share prices. However, the banks were the stars for the market index, with Westpac up 2.7%, CBA 1.2%, NAB 1.2% and ANZ 0.8% higher.
A nice omen for the week was pointed out by Fairfax’s stock-watching team with this: “Shares in mining services company WorleyParsons rocketed 6.9 per cent higher on Friday after Deutsche Bank upgraded their rating to “buy” and pointed to a $13.74 price target.” Even though there has been a bit of takeover/merger talk with a Norwegian suitor, this “buy” signal suggests that the improving mining outlook is starting to make mining services companies look like good value.
I guess the biggest disappointment for the week is a double-edged sword, with the dollar going to a 2017 high of 77.59 US cents. And while this is a reflection of greenback weakness, it also says the world’s view on our economic and profit prospects is encouraging. The only problem is those prospects would be better if the currency was closer to 70 rather than 80 US cents.
That said, this has been a week that finished better than it started and I blame that wonder woman Janet Yellen!
What I liked
- The NAB business conditions index rose from +10.9 points to a 9½-year high of +15.1 points in June. The business confidence index rose from +7.5 points to +9.3 points.
- The number of loans (commitments) for budding homeowners (owner-occupiers) rose by 1% in May. The value of all home loans rose by 1.3% in the month.
- Christmas in July? Well, the number comes from May but it has been reported in July. In May, there were 706 million purchases made with credit and debit cards, up 16.3% on the year and a result just exceeded by the Christmas-time sales in December last year. The purchases amounted to almost $51 billion, up 11% over the year.
- Over the year, a record 1,519,100 tourists came to Australia from Greater China (China and Hong Kong), up 11.3% over the year. Meanwhile, the Yanks are coming, with USA tourists up 15.7% over the past year to 750,200 visitors.
- According to Thomson Reuters, second quarter earnings from S&P 500 companies are expected to increase 7.8% from a year ago.
- US stocks recovered after a fall, on Donald Trump’s son admitting to discussions with a Russian lawyer, but then the Senate delayed the start of the August recess in order to progress with more legislation and Wall Street liked what they heard.
- In trend terms, loans for alterations and additions of homes (renovations) hit 7-year highs.
- Good old China: In June, exports were up 11.3% on a year ago (forecast +8.7%). Imports were up 17.2% (forecast +13.1%). The trade surplus rose from US$40.81 billion to US$42.77 billion.
- Oil rose 4.3% to $US46.13 a barrel this week and the International Energy Agency raised its forecast for demand growth to the strongest in two years. (Still you have to watch oil producers and what they supply.)
- The VIX (or fear index on Wall Street) is under 10, which means there’s a very low level of fear there.
What I didn’t like
- The Westpac/Melbourne Institute survey of consumer sentiment rose by 0.4% in July to 96.6. A reading below 100 denotes pessimism.
- Dwelling starts (commencements) fell by 11.4% in the March quarter. House starts fell by 7.7% and apartments fell by 15.1%.
- Total new lending commitments (housing, personal, commercial and lease finance) fell by 3.1% in May to a 3-month low.
- The price of Australia’s biggest export, iron ore, dropped 3.3% this week. Despite that, resources giants BHP Billiton and Rio Tinto finished the week up 2.2% and 0.8% respectively.
- US home loans fell 7.4% in the latest week, with purchases down 2.5% and refinancing down 13%.
Christmas in August?
Yeah, I know I stretched poetic licence playing the Christmas in July line with the big credit card splurge stat revealed this week for May but I’m hoping all our Christmases come at once in August, with a better-than-expected reporting season. Confession season, which runs before earnings season, has been non-worrying so far but I have to admit that the subdued consumer worries me a little that there are going to be some negative revelations. I hope I’m wrong. If I am, we could easily be financially festive next month.
Week in review
- Could we see eight interest rate increases in the next two years? And what would it mean for stocks? I looked at this topic this week [1].
- Are the banks a buy at the moment? The major banks will soon learn whether they need to raise more capital [2], says Paul Rickard.
- James Dunn shared the five largest pure-play fund managers [3] listed on the Australian Securities Exchange (ASX).
- Tony Featherstone revealed 8 tips to spot a star CEO [4].
- Perennial’s Stephen Bruce chose Lendlease for this week’s Professional’s Pick. Find out why [5].
- In the first Buy, Sell, Hold – what the brokers say [6] for this week, BHP Billiton and Origin were upgraded while Flight Centre was downgraded. And in Thursday’s Buy, Sell, Hold [7], Bendigo and Adelaide Bank and Bank of Queensland were upgraded, while Bellamy’s was downgraded.
- Paul Rickard answered a question about Link Administration Holdings [8] while SuperConcepts’ Graeme Colley responded to a super question.
- And among the likes and dislikes in this week’s hot stock picks [9] were an iron ore company, a building materials company, a retailer and insurer and more.
Top Stocks – how they fared
What moved the market
- Donald Trump Jr released an email exchange this week in relation to a meeting with a Kremlin-linked lawyer during the Trump election campaign last year.
- The US economy gained 222,000 jobs in June, ahead of economist forecasts of 178,000. The US unemployment rate rose to 4.4% from a 16-year low of 4.3% in May.
- The G20 meeting that wrapped up last weekend.
Calls of the week
- Federal Reserve Chair Janet Yellen’s official testimony to Congress where the message was that interest rates will be raised gradually.
- ABC journalist Chris Uhlmann’s [10] assessment of the Trump presidency following the G20 meeting went viral earlier in the week.
- Paul Rickard says Vocus remains in play [11] after a second private equity firmed joined the bidding war for the telco.
The week ahead
Australia
- Tuesday July 18 – New vehicle sales (June)
- Tuesday July 18 – Reserve Bank Board minutes
- Wednesday July 19 – Speech by Reserve Bank official
- Thursday July 20 – CBA Business Sales Index (June)
- Thursday July 20 – Employment/unemployment (June)
- Friday July 21 – Speeches by Reserve Bank officials
Overseas
- Monday July 17 – China Economic growth (June quarter)
- Tuesday July 18 – China House prices (June)
- Tuesday July 18 – US Trade prices (June)
- Tuesday July 18 – US Housing market index (July)
- Tuesday July 18 – US Capital flows (May)
- Wednesday July 19 – US Housing starts (June)
- Thursday July 20 – US Philadelphia Fed index (July)
- Thursday July 20 – US Leading index (June)
Food for thought
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” – Warren Buffett
Last week’s TV roundup
- Recently, former RBA board member and chief economist John Edwards [12] predicted there could be eight interest rate rises in two years, but is that the full story? To explain, he joins Super TV (broadcast on Tuesday 11 July, 2017).
- Will the banks have to issue more capital, and what will happen to share prices as a consequence? Paul Rickard [13] from Switzer Super Report joins Super TV to discuss (broadcast on Monday 10 July, 2017).
- In our July webinar, Peter Switzer and Paul Rickard [14] discussed stocks to watch in the new financial year.
- Sarah Hunter from BIS Oxford Economics joins Super TV to share her outlook for the local and global economy [15], as well as the property sector (broadcast on Wednesday 12 July, 2017).
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.
This week, one of the biggest movers was Western Areas, with its short position increasing by 0.55 percentage points to 16.86%.
Source: ASIC
Chart of the week – S&P500 vs. S&P/ASX 200
US S&P 500
S&P/ASX 200
Source: S&P Dow Jones Indices
The above charts show a sector breakdown of the US S&P500 and the Australian S&P/ASX 200. Information Technology is the biggest sector on the S&P 500 at 22.3% following by Financials (14.5%), Health Care (14.5%) and Consumer Discretionary (12.3%). It’s a different story in Australia, where Financials is by far the biggest sector at 37.5%, followed by Materials at 16.1%. Information Technology companies make up just 1.4% of the index.
Top 5 most clicked stories
- Peter Switzer: Rates to rise 8 times! Good or bad for stocks? [1]
- Paul Rickard: Will banks need to raise more capital? [2]
- James Dunn: 5 fund managers to watch [3]
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [6]
- Tony Featherstone: 8 tips to spot star management [4]
Recent Switzer Super Reports
- Thursday 13 July 2017: Star CEOs [16]
- Monday 10 July 2017: Rate rises a reality? [17]
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.