Though the Trump versus China trade war still has Wall Street’s attention, the really big news was that the US economic comeback is still huge and strong, with 201,000 jobs created in the US over August, when only 191,000 were tipped by economists. However, an even bigger related news story was the jump in average hourly earnings by 2.9%, which was the biggest annualised rise since 2009!
This did raise questions about the expected two rate rises ahead this year, with some wondering whether the Fed could impose a third. This kind of talk is never great for stocks but the small fall in the Dow (79 points) says the positives around job creation was slightly offsetting. That said, I calculate the trade war talk helped the S&P 500 index drop about 1% for the week.
Locally, it wasn’t a great week but it happens when stock markets hit 10-year highs and there has to be profit-takers out there. The S&P/ASX 200 lost 175.7 points (or 2.8%) to close on Friday at 6143.80. You’d have to go back to February to see something as bad as this. Ironically, it happened when we hit economic growth out of the park, with a 3.4% number this week.
But there’s other worrying stuff afoot, so let me list them. Here goes:
- On an historical basis, September is the worst month for Wall Street.
- Our market was up 10% since April and that had to be of interest to profit takers.
- A lot of local companies pay out their dividends, and stock prices generally fall when that happens.
- We expected to hear on Thursday US time whether Donald Trump would hit $200 billion of Chinese goods with tariffs.
- Then there’s the uncertainty around how China responds and all this Trump-v-China shenanigans has hurt commodity prices and they’re important to our stock market. (Related to the above, the Bloomberg Commodity index fell by about 1.2% this week, which hit the miners.)
- Our trade surplus with China went to a record high of $US68.75 billion recently, so when our best customer is due for a right trumping, sorry, I mean thumping, it’s not surprising our stock market shows it.
- And that good growth number of 3.4% took the Oz dollar up. But a lower dollar is better for stocks, though there’s new talk that our dollar is being treated like an emerging economy currency, which might be a stretch excuse for ‘experts’ looking for explanations for a fall in the stock market.
- Also, if foreign investors believed the story that our dollar was going to fall below 70 US cents, well, why wouldn’t they sell at high share prices to hold US dollars while they waited for a lower local dollar so they could buy more quality Aussie companies at bargain prices?
Some news outlets have worried us, using that old chestnut that Trump and trade worries wiped $50 billion off the market this week but the market had ‘wiped on’ $150 billion across five months. I bet if Donald wasn’t grabbing the China bull by its trading horns, then this sell off wouldn’t be happening but that’s the new world under President Trump.
On that subject, the new Trump position (as of overnight) is that the President wants to slap $US267 billion worth of Chinese goods with tariffs, on top of the $US200 billion that could happen any time soon, now that the time period for comment by affected parties ended on Friday. But, typically, Donald gave us hope, as all good negotiators should.
“The $200 billion we’re talking about could take place very soon, depending on what happens with them,” Trump said. “I hate to say this, but behind that, there’s another $267 billion ready to go on short notice if I want.” (CNBC)
Those little words “depending on what happens to them…” mean the Chinese could avert this if they give concessions, like the EU and Mexico did. That said, the Dow dropped 100 points when the market learnt about the extra tariffs in the possibility pipeline.
Meanwhile, the iShares China Large-Cap ETF (FXI) fell 1.4% on the news but interestingly a former Chinese central banker, Zhou Xiaochuan, argues these tariffs would have a minimal effect on the Chinese economy!
“We used a mathematical model to calculate the negative impact of the trade war. It is not very large, it is not significant. It is less than half a percent (of an) impact to the Chinese economy,” Zhou told CNBC’s Steve Sedgwick at the Ambrosetti Forum on the shores of Lake Como in Italy.
He says China would simply re-route affected products to different countries but the problem is making sure that investors know about his calculations that should hose down fears of the effects of a trade war. And on this subject, this guy did underline the real market concerns of this trade trash talk of Donald’s: “We saw when the Lehman Brothers event happened – there was sudden panic and contagion so this kind of thing is not very easy to analyse.” That’s why this is worrying me and others but it also suggests what kind of spike in stocks could come if a negotiated settlement shows up.
Back to other factors that spooked stocks this week, and there was also a tech sell off in the USA, as the likes of Facebook and Twitter bosses copped a Senate grilling in Washington and the contagion spread to local stocks. Don’t ask me why – it’s just something that has become more expected rather than intellectually understandable!
Appen lost 10.4%, NEXTDC dropped 15.8%, Afterpay gave up 17.3% and Xero slipped 9.4% but these guys gained on US hype, so the negative vibes had to be a problem for these crazy-priced stocks. That said, they are probably getting into the interesting price zone.
Banks didn’t gain from rate rises, with ANZ and CBA down for the week but the Royal Commission black cloud and negative leads from overseas haven’t helped.
If you’re looking for a quality company attracting the thumbs up from the likes of Morgan Stanley, then Fairfax says the investment bank has upgraded Resmed to a target price of $17.60, which would be a gain of 12.6%!
What I liked
- That 3.4% economic growth number, which would’ve shocked the negative economists I’ve been teasing on my TV show. Annual economic growth rose from 3.2% to 3.4% – the strongest growth rate in almost six years.
- The fact that an improving consumer sector helped push that growth number up.
- 17 of the 19 industry sectors expanded in the June quarter.
- Real gross national income rose by 0.4% in the June quarter to be up 3.5% on the year. In nominal terms, GDP increased by 1% in the quarter and rose by 5.5% over the year to June.
- The AiGroup services sector gauge eased 1.4 points to 52.2 in August. Services activity has now expanded for 18 consecutive months – the equal longest stretch since March 2008.
- The weekly ANZ-Roy Morgan consumer confidence rating rose by 1% to 117.7, to remain firmly above the longer term average of 113.
- Owner-occupier loans rose by 1.3% and the proportion of first home buyers in the market remained near six-year highs.
- The Performance of Construction index (PCI) eased to 51.8 in August from 52 in July. The index has been above 50 for 19 straight months, indicating expansion in the construction sector. Engineering activity has expanded for 17 consecutive months.
- The ratio of net income on foreign debt to exports of goods and services worsened from a 36-year low of 5.8% to 6.2% in the June quarter but it’s still a good low number for debt worriers!
- The ISM manufacturing index in the US went from 58.1 to a 14-year high of 61.3 in August (forecast 57.7). There were faster increases in new orders, production, employment and inventories and lower inflationary pressures. Construction spending rose by 0.1% in July (forecast +0.5%).
- The ISM New York index rose from 75 to 76.5 in August.
- The IHS Markit euro zone manufacturing purchasing managers index fell from 55.1 to a 21-month low of 54.6 in August but any number over 50 means expansion, albeit at a slower pace.
- Australia’s annual imports from China rose from US$67.77 billion to US$68.75 billion – a record high. Australia’s annual exports to China rose from US$105.44 billion in June to US$106.58 billion in July – a new record high.
- The Caixin China Services Purchasing Managers’ Index fell from 52.8 in July to 51.5 in August – the lowest reading since October 2017. It’s a softer number but anything over 50 still means expansion.
What I didn’t like
- The number of loans (commitments) by home owners (owner-occupiers) rose by 0.4% in July. But loans are down by 6.2% on the year – the biggest fall in 15 months.
- Investment loans fell by 1.3% to near five-year lows.
- The apartments PCI sub-index fell from 36.7 in July to 32.8 in August – the lowest level in nearly six years. Activity in the apartment sector has contracted for six successive months but APRA wanted to stop excessive investor loans from here and overseas, so this was always going to happen. The RBA likes the cooling housing market.
Trends I can’t ignore
While I’m quietly crowing about my predictions that the Oz economy would grow 3% or even higher, there are trends connected to the conspired attempt by government bodies to slow down the housing sector that could affect future growth, such as lending, dwelling construction and house prices. And while say, Sydney’s house price fall over the year has been small at 5.9% (considering its prices grew by 85% since 2011), the impact of constant negative press on the subject, with slightly rising interest rates and trade war concerns that could pull back the expansion of mining locally, doesn’t help the economy. We also can’t ignore the instability in Canberra and the threat of a future Bill Shorten’s policies if he becomes PM. Financial institutions, the real estate industry and property developers all could be concerned about some of Labor’s important policies. This comes when there are good signs that the great growth number was driven by a bigger spending consumer. I really hope the negatives get swamped by the positives but it will be a wait-and-see game, which, of course, I will be calling as the plays unfold. And on plays today – go the Roosters and the Swans!
The Week in Review:
- Forget the big banks and Telstra, you need to look outside the square for yield. Here are 5 great dividend-paying stocks that I think should be on your radar [1].
- Paul Rickard provided an update on our growth-orientated and income portfolios [2], which both saw gains as reporting season pushed the market higher.
- What companies might be pleased to see Bill Shorten at the Lodge? James Dunn looks at four companies that could benefit from a Shorten government [3].
- Has the bell rung on momentum stocks? Charlie Aitken wrote that it’s time to buy the China “bust” and sell the momentum “bubble” [4].
- Tony Featherstone [5] suggested 5 smart yield picks for your portfolio.
- Tribeca portfolio manager Jun Bei Liu picked Seven Group Holdings as the Stock of the Week [6].
- In the first Buy, Hold, Sell – what the brokers say [7] this week, Cabcharge and News Corp were upgraded, and in the second edition [8], Evolution Mining, Freedom Foods Group and Sandfire Resources were all upgraded.
- In Questions of the Week [9], we answered questions about how to invest in BATS and proposed franking credit changes by the ALP.
- Transurban and Santos Limited [10] are our Hot Stocks for the week.
Top Stocks – how they fared:
What moved the market?
- The risk of trade war escalation continues, with the United States threatening tariffs on an additional US$200 million of Chinese goods, and China confirming it will retaliate.
- Weakness in emerging markets and a stronger US dollar.
- Profit-taking in ‘market darling’ stocks, including CSL, Afterpay Touch, Altium and Cochlear.
Calls of the week:
- Jun Bei Liu picked Seven Group as a buy [6], with projections of a 25% growth in profits in 2019 and 22% in 2020.
- John Millman, for his upset win against Roger Federer in the fourth round of the US Open
- A British man has claimed he has located Malaysian Airlines flight MH370 on Google Maps, telling the Daily Star Online he found what appears to be a large aircraft in the Columbian jungle.
- The Switzer Listed Investment Conference [11], for bringing together some of Australia’s best money managers. It’s your last chance to claim complimentary tickets for being a loyal subscriber. Click here to claim your tickets [11] and enter the promo code SSR.
The Week Ahead:
Australia
Monday September 10 — Speech by Reserve Bank official
Tuesday September 11 — NAB Business survey (August)
Tuesday September 11 — Weekly consumer sentiment
Tuesday September 11 — Lending finance (July)
Wednesday September 12 — Consumer confidence (September)
Wednesday September 12 — Credit & debit card lending (July)
Thursday September 13 — Labour force (August)
Overseas
Monday September 10 — US Consumer credit (July)
Monday September 10 — China Inflation (August)
Tuesday September 11 — US NFIB Business Optimism (August)
Tuesday September 11 — US JOLTS job openings (July)
Wednesday September 12 — US Producer prices (August)
Wednesday September 12 — US Beige Book
Thursday September 13 — US Consumer prices (August)
Friday September 14 — US Export/Import prices (August)
Friday September 14 — US Retail sales (August)
Friday September 14 — US Industrial production (August)
Friday September 14 — China activity data (August)
Food for thought:
“My movies were the kind they show in prisons and airplanes, because nobody can leave.”
– Burt Reynolds
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:
Ahead of the US mid-term elections on November 6, more women are running than ever before as this chart from the BBC shows:
Source: BBC
Top 5 most clicked:
- 5 great dividend-paying stocks that should be on your radar! [1] – Peter Switzer
- 4 stocks to benefit from a Shorten government [3] – James Dunn
- Buy the China “bust”, sell the momentum “bubble” [4] – Charlie Aitken
- Hot stocks: the Top 2 this week [10] – Penny Pryor
- 5 smart yield picks for your portfolio [5] – Tony Featherstone
Recent Switzer Reports:
- Monday 3 September: Outside the square [12]
- Thursday 6 September: No pain no gain [13]
Important: This content has been prepared without taking saccount 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.