Stock market optimists got a week worth remembering, with the S&P/ASX 200 Index up 0.81% for the week and Friday delivering a 77.4 point (or 1.29%) gain to end at 6094. And this was the best daily rise since July last year!
To explain this great week at the office, Kerry Craig, market strategist at J.P. Morgan, suggested to Fairfax Media that “I’d say it’s a case of things being ‘not as bad as feared’ from global events and stronger data from the U.S.”
However, in true Trump fashion, just when you thought it was safe to go back into the stock market water, damn Donald pulled off one of his tariff stunts: 25% tariffs on up to $US50 billion of Chinese goods!
The President explained that it was “in light of China’s theft of intellectual property and technology and its other unfair trade practices.”
And surprise, surprise, China has returned fire, proposing to slug tariffs on US autos and farm products. What’s even more worrying is that Donald had added that he’d impose more tariffs on Chinese goods if China retaliates!
With all this hovering, it won’t be great for our stock market on Monday. Interestingly, US markets did rebound somewhat after hearing the tariff war news, after the Dow Jones dived over 200 points at one stage. But the uncertainty of the trade war ahead will hurt any market optimism that built up over the week locally.
Ignoring the possible trade troubles ahead, we received some good market news lately, which clearly has helped stocks trend higher. Let me list them:
- Moody’s affirmed Australia’s Aaa credit rating, saying the outlook remains stable. “The stable outlook on Australia’s rating reflects Moody’s expectation that, even in the event of shocks, possibly in the housing market and/or to the economy’s access to external funding, the resilience of the economy supported by countercyclical macroeconomic policy would allow Australia’s credit metrics to remain consistent with a Aaa rating,” the company said.
Moody’s even noted our stable GDP growth and strong growth potential relative to peers, “a moderate general government debt burden and strong institutions that preserve macroeconomic and financial stability, as key factors supporting the rating affirmation.”
- Our GDP growth is over 3%.
- Our unemployment rate fell from 5.6% to 5.4%.
- Our Budget Deficit is tumbling – in the year to April 2018, the Budget deficit stood at $12.1 billion (less than 0.7% of GDP) – the smallest rolling annual deficit for nine years!
- Consumer and business confidence are above their long-term average.
- Interest rates are low and expected to stay that way.
- The dollar dropping to 74.46 US cents is also an overdue market plus, helped by the Fed’s more bullish tone for interest rates. The idea that two more rises in the US (rather than one) has even offset a spike in commodity prices on Friday to take our dollar lower.
- Banks may have seen their Royal Commission low, with CBA nearly hitting a five-year low on Thursday, which was followed up by a 2.27% rebound on Friday to end at $68.98.
On the specific stocks that could help our market get into new recent highs, we’ve seen Telstra beat its recent lows, rising 6.1% to register its best week this year, with its share price closing at $2.94. The strategy day next week is seen as a potential plus for the telco and you’d have to hope that the company’s CEO, Andy Penn, has a big one. Gee he’s in need of one!
As we saw in the US, takeover news always helps stock markets, with Comcast offering $US65 billion in cash for most of 21st Century Fox, topping Disney’s $US50 billion scrip offer.
Locally, APA Group received a takeover offer from CK Group worth $13 billion but the ACCC will have to approve this one, which took away some market enthusiasm.
One worrying revelation for me was that a legend of the market, Ray Dalio, founder of Bridgewater Associates, said 2019 would be a dangerous year.
“We are bearish on financial assets as the U.S. economy progresses toward the late cycle, liquidity has been removed, and the markets are pricing in a continuation of recent conditions despite the changing backdrop,” Bridgewater has told its clients.
Now Ray admits that he has made mistakes before. In 1982, his cockiness and self-belief saw him lose a fortune. However, he believes that since then his systems are better and his performance has meant that he now has $160 billion under management.
But wait, there’s more. I’ve written about this before but it’s more positive!
Another legendary hedge fund manager, with a legend’s name – Paul Tudor Jones – has a take on stocks that keeps me long and in the game.
This is what he told CNBC late this week: “I don’t think there’s any surprises here, which is why the markets aren’t reacting that much,” said the famed and reclusive hedge fund manager, who called the October 1987 market crash. “We’ve been trading in the past 12 months leading up to this point so this is semi-anticlimactic.”
And there’s more! He added that a big rally in stocks was coming later in the year. Talking to Andrew Ross Sorkin, the CNBC host, who wrote Too Big To Fail and was co-creator of the Showcase drama Billions, Tudor Jones was very bullish, despite rising US interest rates over the remainder of the year.
“I think we’ll see rates move significantly higher beginning some time late third quarter, early fourth quarter,” Tudor Jones tipped. “And I think the stock market also has the ability to go a lot higher at the end of the year. … I can see things getting crazy, particularly at year-end after the mid-term elections … to the upside.”
Of course, Ray could be right about 2019 but Tudor Jones’ view tells me that it’s not dumb to remain long stocks for at least the rest of this year.
What I liked
- Employment rose by 12,000 in May, after an 18,400 increase in jobs in April (previously reported as a rise of 22,600 jobs). Full-time jobs fell by 22,600, while part-time jobs rose by 32,600. Economists had tipped an increase in total jobs of around 19,000.
- The Unemployment rate fell from 5.6% to a 6-month low of 5.4% but the participation rate fell from 65.6% to 65.5%.
- The ANZ/Roy Morgan weekly consumer sentiment jumped 6.5 points (5.6%) to a 21-week high of 123 points. The Westpac/Melbourne Institute survey of consumer sentiment index rose by 0.3% to 102.1 in June. The index is above its long-term average of 101.5. A reading above 100 denotes optimism.
- The NAB business conditions index fell from an upwardly-revised record high of +21.2 points (previously +21.1 points) in April to +15.1 points in May. The business confidence index fell from an upwardly-revised +10.6 points (previously +10.1 points) in April to +6.2 points in May.
- The NFIB Business Optimism in the US Index rose by 3 points to 107.8 (survey: 105.2) in May.
- In the US, headline and core consumer prices both lifted by 0.2% in May (surveys: +0.2%) to 2.8% and 2.2% respectively
- This CommSec headline: “Chinese data confirms solid economic activity”. And this as well: Chinese exports rose by 12.6% in the year to May (forecast 10%), with imports up 26% (forecast 18.7%).
- The Donny and Kimmy show in Singapore has to be liked.
- The Italian Finance Minister Tria this week said that there has been no discussion of an Itexit from the EU.
What I didn’t like
- The number of loans (commitments) by home owners (owner-occupiers) fell by 1.4% in April – the fifth consecutive monthly decline. Loans are down by 2.9% on the year but this is what APRA and the RBA wanted to slow down the housing boom.
- Chinese retail sales rose at an 8.5% annual rate in the year to May (forecast: +9.6%). It was the slowest annual growth of retail sales in 15 years. Production rose by 6.8% over the year (forecast 6.9%). In the five months to May, investment grew by 6.1% (forecast +7%).
- AMP’s Shane Oliver telling me that “We continue to expect the ASX 200 to reach 6300 by end 2018.” I want more than that so I have to hope this good bloke’s call is off the mark.
We all need inspiration…
“We’re all working together because of me!” This was Donald Trump commenting on China’s retaliation of tariffs. He thinks his tough tariff talk will get China negotiating and he insists that he and the Chinese leadership are a team of mates. If ever anyone needed to see how self-belief works to keep someone in the success zone, Donald is the man!
The Week in Review:
- This week was a short week with the Queen’s birthday public holiday on Monday. James Dunn wrote about 5 bargain LICs trading at a discount [1]. Do they offer better dividends?
- Ramsay looks undervalued and its long-term story remains intact, which means it may be due for a re-rating. Tony Featherstone [2] looked into RHC.
- Tom Millner and Will Culbert from Contact Asset Management explain why and how the infrastructure pipeline is here for the long-term. [3]
- To continue the infrastructure theme, Sarah Shaw, global portfolio manager and CIO at 4D Infrastructure, looked at a global giant in the LNG Industry in this week’s Professional’s Pick. [4]
- And in Buy, Hold, Sell – what the brokers say [5], brokers were decidedly more negative this past week, but BHP and Rio managed to get upgrades.
- Plus, this week we answer readers’ queries [6] about a possible missed opportunity offshore and transition to retirement (TTR) pensions.
Top Stocks – how they fared:
What moved the market?
- US interest rates were lifted for the second time this year with the Federal Reserve lifting the rate by 0.25%. It suggested two further rate rises this year.
- The European Central Bank will bring the curtain down on its 2.4 trillion (euro) asset purchase program in December. It also postponed any interest rate increase to at least mid-2019.
Calls of the week:
- Tony Featherstone wrote that Ramsay Health Care’s price drop masks longer term worth.
- Kim Jong-un and Donald Trump choosing to shake hands for 13 seconds at the Summit in Singapore.
- A South Korean ambassador to Australia said Kim Jong-un is “a trustworthy and sincere person”.
The Week Ahead:
Australia
- Monday June 18 – Tourist arrivals (April)
- Tuesday June 19 – Reserve Bank Board minutes
- Tuesday June 19 – Residential price indexes (March Qtr)
- Wednesday June 20 – Reserve Bank Governor speech
- Wednesday June 20 – Skilled internet job vacancies
- Wednesday June 20 – CBA Business Sales index (May)
- Thursday June 21 – Population data (December Quarter)
- Thursday June 21 – Detailed job data (May)
Overseas
- Monday June 18 – US NAHB housing market index (June)
- Tuesday June 19 – US Housing starts (May)
- Wednesday June 20 – US Existing home sales (May)
- Thursday June 21 – US Philadelphia Federal Reserve index
- Thursday June 21 – US Home price index (April)
- Thursday June 21 – US Leading index (May)
- Friday June 22 – US, Europe, Japan “Flash” surveys
Food for thought:
“Many people in the world will think of this as a . . . form of fantasy . . . from a science-fiction movie.” – Kim Jong-un to Donald Trump at Tuesday’s Summit meeting
(Answer to last week’s riddle was 2)
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:
Eight countries have more nuclear weapons than North Korea
Current Fed dot plot:
Top 5 most clicked:
- Ramsay Health Care – price drop masks longer term worth [2] – Tony Featherstone
- 5 bargain LICs trading at a discount [1] – James Dunn
- Is Transurban another expensive yield trap? [7] – Charlie Aitken
- Buy, Hold, Sell – what the brokers say [5] – Rudi Filapek-Vandyck
- Buy, Hold, Sell – what the brokers say [8] – Rudi Filapek-Vandyck
Recent Switzer Super Reports:
Thursday 14th June: Build it and they will come [9]
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.