Switzer on Saturday

Trump and China are playing ping pong with our portfolios

Founder and Publisher of the Switzer Report
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The Dow was down 280 points overnight until the last hour of trade and the world’s most talked about stock market index turned positive. But negativity prevailed, to see the Index down 90 points.

At the same time, the yield on the US 10-year bond ticked up, after being down earlier in the trading session.

The cause?

You guessed it – Donald J. Trump.

And when I try to understand the collective thought of market players, who determine where stock indexes head each day, I can’t help thinking about a game very popular in China – ping pong!

And our market-dependent portfolios and wealth are oscillating on this game.

I saw it as China taking the Robert De Niro option that goes: “Somebody messes with me, I’m gonna mess with him.”

That was a warning shot, reminding Donald that China may not be able to put as many tariffs on US goods as the Yanks can on China but they can depreciate the Yuan and ban US agricultural goods. (I wonder if our 18 months of trade surpluses has a little to do with the trade war?)

Interestingly, over the rest of the week, traders were comforted that China had moved to stabilise its currency, which showed China still wants to play ping pong. And then Donald’s National Economic Council Director, Larry Kudlow, in a timely way, informed the media/market that the President was still planning to host a Chinese trade delegation in September.

Larry and Donald were still pinging and ponging.

And as long as all players keep holding their ping pong bats, then stocks will fight gravity. However, if the market believes the game is over and the Chinese are prepared to hang up their bats until the November 2020 election possibly gives them a new US leader to deal with, I don’t want to be long stocks.

This would send stocks and confidence down and justify the messages that the bond market is telling us that a US and global recession is on the cards.

This is how important this game of ping pong is. Right now looking at Wall Street this week and overnight, most market-driving traders and investors think the game is still on, despite Donald telling reporters that “China wants to do something, but I’m not doing anything yet…Twenty-five years of abuse. I’m not ready so fast.”

Sure, it’s negative but he does want to make a deal and we can only hope that the Chinese don’t get tired of his negotiating tactics, which involve getting the best trade deal possible but also maximizing the political pay off for his upcoming election.

But he is playing with economic fire, with central banks in New Zealand, Thailand and India cutting official interest rates this week to shore up their economies, with the US-China trade war threatening recession.

And it’s the reason why the RBA boss, Dr Phil Lowe, told our leaders in Canberra this week that interest rates could go to zero. He didn’t think they would but given the trade war question marks, you can’t rule it out.

On the local front, we took this ping pong battle really seriously, with the S&P/ASX 200 Index falling 184.2 points (or 2.7%) to 6584.4.

This escalation of the trade war hit material stocks, with BHP down 4.1% to $37.20, Rio lost 4.2% to $87.64, while Fortescue Metals gave up 5% to $7.26.

Our major banks dropped 2-3% because the CBA reported weakly, which shouldn’t surprise, considering the cost of the repair work post-Royal Commission. And lower interest rates in bond markets are never good for banks for a number of reasons.

Of course, tech stocks overreact in both directions to volatile market conditions and that’s why Appen dropped 15.4%, WiseTech 14.1% and Afterpay 5.2%.

Meanwhile, earnings season hasn’t helped, with IAG, AMP and AGL not impressing anyone. However, James Hardie did and shot up 9.2%. And of course gold miners had a ripper of a week, with this high stakes ping pong game playing right into their fear and anxiety court.

What I liked

  • ANZ job ads rose by 0.8% in July after rising 4.9% in June – the biggest monthly gain in 18 months.
  • The trade surplus rose from $6.17 billion to a record high of $8.04 billion in June. Australia has recorded 18 successive monthly trade surpluses. The rolling annual surplus was a record $49.89 billion in the year to June.
  • Net exports (exports less imports) are tipped to add 0.4 percentage points to economic growth in the June quarter. Commonwealth Bank Group economists tip a $1.4 billion current account surplus in the June quarter, the first surplus in 44 years.
  • This assessment of CommSec on the RBA’s Statement on Monetary Policy: “Looking out over the next 12-18 months, the Reserve Bank tips stronger economic growth, a modest lift in inflation and slightly lower jobless rate than applies currently. So the Reserve Bank assumes that the economy is headed in the right direction.”
  • In trend terms, business fixed loans and revolving credit facilities stood at an 11-year high of $35.69 billion in June.
  • Excluding refinancing, the value of owner-occupier home loans rose by 2.4% in June, with investment loans up 0.5%.
  • In seasonally-adjusted terms, the share of first-home buyers in the home lending market hit a 7½-year high of 29.1% in June.
  • The IPD/TIPP economic optimism gauge in the US fell from 56.6 to 55.1 in August (forecast 54.6) but a number over 50 indicates positivity.
  • The ISM services index in the US fell from 55.1 to 53.7 in July (forecast 55.5). But the Markit services index rose from 51.5 to 53.

What I didn’t like

  • The weekly ANZ-Roy Morgan consumer confidence rating fell by 2.3% to 115.8 points, after rising by 1.9% in the previous week. Consumer sentiment remains above the average of 114.4 points held since 2014 and the longer-term average of 113.1 points since 1990.
  • In July, 83,184 new vehicles were sold, down by 2.8% over the year.
  • The Australian Industry Group (AiGroup) Performance of Services Index (PSI) fell by 8.3 points to 43.9 points in July – the lowest level since November 2014. Readings below 50 indicate a contraction of services sector activity. However, the ‘final’ CBA/IHS Markit Services Purchasing Managers’ Index (PMI) fell by 0.3 points to 52.3 points in July. (I’m hoping the CBA reading is more accurate than the IAG one but I have no proof!)

Don’t miss this

The SMH tells us that “Westpac chief economist Bill Evans said Australia’s economy could be at a potential inflection point, with additional stimulus from tax cuts and monetary policy, although he acknowledged there would still be weakness.” Bill was the first to call for rate cuts and was on the money, so let’s hope his economic crystal ball is still working!

One for David

The Chair of AMP, David Murray is a friend, so I have to cheer this upbeat rating, at a time when AMP and good news is rare. Morgan Stanley increased its price target on AMP and upgraded the stock from ‘underweight’ to ‘equal-weight’. The investment bank increased its price target on AMP from $1.50 to $1.65. And the market believed it, with its stock price up 11.5% yesterday to $1.93.

The week in review:

Top Stocks – how they fared:

The Week Ahead:

Australia
Tuesday August 13 – NAB business survey (July)
Tuesday August 13 – Speech by Reserve Bank official
Wednesday August 14 – Consumer confidence (August)
Wednesday August 14 – Wage Price Index (June quarter)
Thursday August 15 – Employment/unemployment (July)
Thursday August 15 – Average Weekly Earnings (May)
Thursday August 15 – Speech by Reserve Bank official
Thursday August 15 – Tourist arrivals/departures (June)

Overseas
Monday August 12 – US Monthly Budget Statement (July)
Tuesday August 13 – US NFIB business optimism (July)
Tuesday August 13 – US Consumer prices (July)
Wednesday August 14 – China Investment/production/sales (July, annual)
Wednesday August 14 – US Import/export prices (July)
Thursday August 15 – China New home prices (July, annual)
Thursday August 15 – US Retail sales (July)
Thursday August 15 – US Industrial production (July)
Thursday August 15 – US Manufacturing gauges (August)
Thursday August 15 – US NAHB Housing Market Index (August)
Friday August 16 – US Housing starts (July)
Friday August 16 – US Consumer confidence (August)

Food for thought:

 “The stock market is a device for transferring money from the impatient to the patient.” – Warren Buffett

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:

Following the stock market sell-off earlier this week, CNBC published the following chart that shows the consequences of missing the best-performing days for the S&P 500. The chart looks at the average annual returns of a US$10,000 investment between 1999 and 2018:

Top 5 most clicked:

Recent Switzer Reports:

Monday 05 August: Is it risky to remain long stocks?

Thursday 08 August: 3 ways to benefit from a lower Aussie dollar

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.