Switzer on Saturday

Will a US trade deal offset Aussie market headwinds?

Founder and Publisher of the Switzer Report
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Just when I was about to admit that the Oz economy was looking at a slowdown from growth once tipped by the Reserve Bank to be 3.5% to something in the 2.7% region, along comes the huge story out of the US that could change everything!

Wall Street is set for being up for four days in a row with a huge market-mover in the shape of a potential US-China trade deal, which could give President Trump’s economy a trillion dollar boost!

For those of us who have been arguing that this trade standoff was really hurting stocks and our wealth-building goals, you’d have to love this CNBC headline overnight: “Dow jumps more than 350 points after China offers a way to eliminate US trade imbalance!”

Few of us expected to see that and it looks like Xi Jinping and his trade negotiators have been doing an Edward de Bono course on lateral thinking (or thinking outside the square) and the market really likes that kind of stuff!

On Thursday we saw how stocks jumped in the US and it carried over to the local market when the US Treasury Secretary, Steve Mnuchin talked about easing back on tariffs imposed on China but Friday’s revelation is a real game changer.

This is how Bloomberg reported the China initiative: “China has offered to go on a six-year buying spree to ramp up imports from the U.S., in a move that would reconfigure the relationship between the world’s two largest economies, according to officials familiar with the negotiations.”

This is not a firm offer but it’s the progress that is exciting professional players on Wall Street. And you have to remember that the US’s early position was a trade deficit clean up within two years! But as I say, it’s the progress that has helped stocks overnight and it has to be good for our market on Monday.

The offer implies raising the annual import total of US goods into China from $155 billion to around $200 billion in 2019 and in increasing steps thereafter, reaching an annual total of about $600 billion by 2024, one of the people said.

Also helping stocks were more “patience” references from the New York Federal Reserve President, John Williams, who again told the market that the US central bank won’t be in a rush to raise rates but he did say he expects both “strong” and “healthy” growth this year. This is at odds with a growing number of economists who’ve been marking down US growth and I guess if the trade deal ends up being better than expected, then both stocks and growth could prove to be better than expected.

Don’t forget, Donald Trump knows he can’t face a re-election poll at the end of 2020 with a recession and stock market crash written on his CV!

Adding to the positivity was a Fed report on manufacturing with the sector showing the biggest gain in 10 months. That was another surprise for economists.

By the way, given the Chinese commitment to more local stimulus and the possibility of a better-than-expected trade deal, it is setting the scene for a comeback for the stock market in China so interest in related ETFs is likely to be on the increase.

The following chart shows how Chinese stocks, as shown in the Shanghai Composite, have been under pressure for some time and this trade deal talk has already started a kick up for the index.

Source: finance.yahoo.com

All this is good news for local stocks that have a few home-grown headwinds to deal with, including the Royal Commission, falling house prices and a May election. A slowing China was another ill-wind that could soon be abating.

AMP Capital’s Shane Oliver penned the following this week and his thinking can’t be easily faulted.

“I think there is a bit of wariness locally over the state of the Australian economy, with all economic indicators released since Christmas except retail sales being soft, and this is flowing into a bit of uncertainty about the upcoming profit reporting season.”

Note he used the word “soft” and that’s appropriate because the stats aren’t bad but they’re not as great as we expected, given we thought 3.5% growth was coming. It’s like the US view on growth before the good news on trade and tariffs popped up – great growth expectations might end up being good to OK growth.

The economic question mark was seen last week with consumer confidence. The Westpac monthly number saw a 4.7% slump and a 16-month low. However, the ANZ weekly one saw a 1.4% rise in confidence, which was way above the long-term average.

The conflicted messages even showed up in China data, where exports were 4.4% lower than a year ago, and worse than forecasted, and imports were 7.6% down on a year ago and worse than the forecast of 5%, but the trade surplus was the biggest in three years! Try figuring that out.

Two hours before the close and the Dow was up 355 points and the hi-tech Nasdaq was up over 85 points. Tech stocks and their link to China haven’t done well since the trade war hotted up.

As I’ve said, all this must help stocks here next week and that’s despite two weeks of gains for the S&P/ASX 200 index. The top 200 stocks index was up 105 points (or 1.8%) for the week and finished at 5879.6.

A sign that has to be liked, at least for stock market players, was the uptrend for banks. ANZ put on 3.3%, CBA 2.2%, NAB 1.4% and Westpac 2.1%, while Macquarie slam dunked with a 4.4% gain!

As someone who told you on Monday that the top 20 companies looked like value, those rises (and seeing Suncorp up 5.7%) really made me feel good about my analysis.

And after my Money Talks program focused on Zip Co and Afterpay, it was heartening to see Zip up over 5% over the week, while it’s bigger rival zoomed up 19% after a week of big, positive announcements.

What we’re seeing is a hell of a lot of the bad news that drove stocks down in the December quarter now being upgraded to not so bad to even much better than expected. Let’s hope these expectations are matched by future reality.

Given the trade news out of the US and China overnight, we could be in for another positive week next week. Keep hoping Donald stays away from twitter!

What I liked

  • The number of loans for home owners (owner-occupiers) fell by 0.9% in November, after rising by 2.1% in October, which was the largest gain in 12 months. The small fall was what I liked and the fact that the proportion of first-time buyers in the home loan market rose from 18.1% in October to a 6-year high of 18.3% in November.
  • In real trend terms, a record $19.8 billion of work was done in building new homes in the September quarter and in that quarter $75.1 billion of residential and commercial building work was yet to be completed, down from the record high of $76.4 billion in the June quarter. These suggest a housing collapse hasn’t yet really started.
  • The weekly ANZ-Roy Morgan consumer confidence rating rose by 1.4% to 116.8, above the average of 114.3 held since 2014 and higher than the longer term average of 113 since 1990. The estimate of family finances in a year’s time was at 7-month highs.
  • The annual fall in petrol prices to January 13 stands at 11.9% – the biggest decline in over two years (since October 2016).
  • Tourist arrivals fell by 0.1% in November with Aussie tourist departures down by 0.4%. Tourists from China hit record highs over the year but annual growth of Chinese inflows is the slowest in 8½ years. The slowing is a worry but it’s off such a high base and I like the fact that tourists are staying in Australia longer and the key growth area is family and friends. A record 30% of visitors to Australia are here to see family or friends. It says something about the value of immigration to economic growth!
  • News China was ramping up a stimulus program.
  • Shares in Goldman Sachs rose 9.5% and Bank of America rose 7.2% after issuing better-than-expected results again, underlining how stupid the sell off of stocks was before Christmas.
  • The US Beige Book indicated that economic activity expanded in most of the US, with eight out of 12 Federal Reserve districts reporting modest-to-moderate growth. All Fed districts noted that labour markets were tight, with moderate wage gains.
  • The NAHB housing market index in the US rose from 56 to 58 (forecast 56). Mortgage applications rose by 13.5% last week.

What I didn’t like

  • The Westpac/Melbourne Institute survey of consumer sentiment index fell by 4.7% to a 16-month low of 99.6 in January. A reading above 100 denotes optimism.
  • The UK Parliament rejected the Brexit deal by 432 votes to 202 votes.
  • Luxury good makers and technology led the stock market declines mid-week. LMVH fell 2.6%, with Hermes down 1.6%. Luxury goods can be a good indicator for where the economy is going.

Likes versus dislikes

Shane Oliver is right that economic data in Australia has been softening but it could be a soft patch related to the slump in house prices, which is related to silly and restrictive post-Royal Commission bank lending, the stock market sell off, leadership changes, slow wage rises and the fact that many economic readings have been in record high territory.

Today “likes” outnumbered “dislikes” and as I say, while some readings like car sales are down, they are coming off huge levels in previous years.

I’m loathe to go pessimistic because I believe a US trade deal will partly offset any Aussie market weakness driven by local issues. I’m prepared to pull back on my optimism but that’s all for now.

The Week in Review:

Top Stocks – how they fared:

  

What moved the market?

  • The United States is reportedly considering lifting tariffs on Chinese imports according to The Wall Street Journal.
  • Earnings season in the US got off to a positive start, with gains on stocks throughout the week.

Calls of the week:

  • Michael McCarthy shares my view that buying the dip is still on.
  • Tony Featherstone said Tabcorp is well positioned and may deliver a total return of almost 20% over one year.

The Week Ahead:

Australia
Monday January 14 – Credit & debit card lending (November)
Tuesday January 15 – Weekly consumer confidence
Wednesday January 16 – Monthly consumer confidence (January)
Wednesday January 16 – Building activity (September quarter)
Thursday January 17 – Housing finance (November)
Friday January 18 – Tourist arrivals/departures (November)

Overseas
Monday January 14 – China International trade (December)
Monday January 14 – China Money supply & lending (December)
Tuesday January 15 – US Producer prices (December)
Tuesday January 15 – US Empire State index (January)
Wednesday January 16 – US Beige Book
Wednesday January 16 – China House prices (December)
Wednesday January 16 – US Retail sales (December)
Wednesday January 16 – US Export/import prices (December)
Thursday January 17 – US Housing starts (December)
Thursday January 17 – US Philadelphia Federal Reserve index (January)
Friday January 18 – US Industrial production (December)

Food for thought:

“Here’s something to think about: How come you never see a headline like ‘Psychic Wins Lottery’?” – Jay Leno

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:

The US sharemarket typically returns the most during the third year of a president’s four-year term, as shown in this chart from AMP Capital’s chief economist Shane Oliver:

Source: Bloomberg, AMP Capital

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Recent Switzer Reports:

Monday 14 January: A Report full of tips!

Thursday 17 January: Buy the dip

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.