Australian Market Summary (Issue 408) – 15 July 2016

Australian Market Summary – 15 July 2016

This week’s note has been written post-close on Thursday night, since much of Friday will be spent at a staff offsite.

The market momentum continued this week and with the 4 days of trade done, the ASX200 is up a hefty 3.5%.

Australian shares have taken much of their lead from offshore markets, with the jump to all-time highs in the US a key driver.

Last Friday night, US June employment figures came in well ahead of expectation and on top of the excellent jump in June service sector activity reported earlier last week, it would seem to suggest that the US economy is operating with a reasonable head of steam.

In spite of the stronger data, investors seem unwilling to believe the Federal Reserve will escalate their cautious pace of interest rate tightening, with markets still pricing in as many as three (3) 0.25% rate hikes LESS than the estimates of Federal Reserve board members themselves in the coming 18 months.

These benign expectations might be supportive now, but arguably look optimistic and hence carry risk of disappointment.

Miners strength continued

In addition to the offshore momentum, Australian shares this week were supported by continued strength in Chinese steel prices.

Miners rose just under 5% for the week and are now at their highest absolute level since June last year. Moreover, the mining sector relative to the financial sector now sits at 2-year high in spite of ongoing indifference in Chinese steel demand.

Personally I think the spike higher in Chinese steel prices, iron ore prices and ultimately mining shares looks to be another head fake.

There seems little basis to believe in a resurgence of Chinese steel production particularly since much of the reason for recent Chinese steel price strength is government mandated supply cuts. The higher steel prices are dragging iron ore higher with them, even though inventories of ore at Chinese ports continue and now stand at an 18-month high.

At some point this spiral higher will stop and just like we called it in April, I feel confident we are again nearing a peak.

We reiterate to those who failed to SELL their BHP back in April at $21, that they should again focus on making this sale (Thursday close $20.34).

Furthermore, Fortescue Metals (FMG) at $4.20 is an outright sell for those long-suffering shareholders.

FMG now sits at a 2-year high and trades approximately 13x P/E with iron ore prices in the low $50/t range. Given risks of further weakness in iron ore and the groups still not inconsequential $6bn+ of debt, it would seem a prudent move to make.

Rio Tinto (RIO) though better positioned than both BHP and FMG, also looks like a stock that could be trimmed, though my belief is that a far fairer share price to sell is around the $53-55 level.

RIO like BHP has specifically cut its dividend payout policy to ~50%, meaning that it too will likely only pay a dividend in the order of 2.5% for 2016 and 2017.

With Chinese steel production still over 50% of the world total, and momentum there still very much on the wane, there seems little reason to hold miners in portfolios for the interim.

Bank shares saw some respite this week too, with the sector also up just under 5%.

Australian Business Conditions at 8-year high

On the economic front this week the Australian Dollar took heart from stronger than expected NAB Business Conditions in June.

Businesses reported conditions had reached their best level in 8 years.

Despite this rosy assessment, much of the corporate momentum garnered in the last 6mths stems from the falling Australian Dollar seen during 2015.

Ironically, the recent strength of the AUD actually stands at risk of clipping this momentum and it is with the AUD at 76.30c in mind that the RBA will most definitely look to cut interest rates at their next meeting in early August.

Next Week

A couple of key outcomes likely next week that we are looking for include BHP’s full year profit results, and the ACCC’s decision into the takeover of Asciano (AIO) by the QUBE (QUB)/Brookfield consortium.

The BHP results are unlikely to provide much fodder for bulls nor bears, however we remain firmly committed to the idea of selling BHP and moving on to new names, as we highlighted above.

On QUB, we really like the AIO deal and we think the ACCC will likely wave it through.

The underlying business conditions for QUB & AIO are difficult, however the synergies of this deal, and the ultimate link it will provide to the group’s proposed Moorebank inter-modal hub in the years to come is particularly exciting.

We are now entering reporting season, so we should have plenty to report on in the coming 2 months and with any luck, some new opportunities to turn the portfolio over.

Disclaimer: This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.

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