Australian Market Summary (Issue 427) – 25 November 2016

 A few things this week, but it is a little bitty.

Of note, this morning Westpac (WBC) were the first major bank to hike fixed-rates on home loans and investment property loans.

This is kind of a big deal, and I am pretty sure most Australians weren’t expecting this rate hike. We haven’t yet seen standard variable rates rise, but I would expect this will follow suit soon enough if funding costs have moved to a new level, as I suspect they have.

WBC have raised as follows:

  • 5-year fixed-rates for investment loans rise 0.60% to 4.79% (big)
  • 5-year fixed-rates for owner occupiers rise 0.54%to 4.59%
  • 2 & 3-year fixed rates for investment loans rise 0.30%
  • 2 & 3-year fixed rates for owner occupiers rise 0.24%

Markets

Australian share-markets continued to trade optimistically this week rising another +2.5% as we head into Thanksgiving weekend in the US.

The US-dollar index rose to a 10-year high.

Commodities again led the charge with the oil sector +5% and miners rebounding a further 4%.

Chinese steel and iron or futures surged again, taking back the 15% fall they saw last week to close near their highs once again.

The volatility in China’s steel markets continues to beggar belief (at least with me), and still feels overly exuberant in light of the rising iron ore inventory and clouded production outlook.

The deputy chief of China’s National Development & Reform Commission said on Thursday that current supply-demand fundamentals don’t support the rally seen in coal and steel prices, but I have felt that way for months and incredibly there seems little sign of any imminent pullback.

Volumes in Chinese futures markets for steel, iron ore and coal are off the charts, so much so that current daily volumes in iron ore are the equivalent of China’s entire annual imports.

It’s insane.

Right now sentiment is being supported by the governments clamp down on coal production, however in response to the spike higher in prices, the Chinese government is going rapidly into policy reversal and allowing qualified coal mines to once again raise production as an offset.

It feels inevitable to me that this recent spike in coal and iron ore prices will unwind, much like it did in April, but I have been saying that for some time now and the momentum in Aussie miners is relentless.

Fortunately, oil prices this week got a wriggle on and rose +7%, buoyed by hopes for an agreement to cut production at Monday’s OPEC meeting.

Oil Search (OSH) and Woodside (WPL) both rose 5% on the week, and WPL is now up through $30 for the first time since December 2015.

For now we are thinking WPL can push a little higher, but in light of our view that oil settles in the $50-60/barrel range (currently $48/barrel), we think WPL might cap out in the $32-34 range.

Beyond commodity moves this week, the other notable trend to continue was the selling of government bonds.

Australia’s 10-year bond yield is now 2.78% and at its highest level in a year. It is a full 1% above where it was as recently as late July.

The disparity in performance between bonds and equities post Trump’s election success is significant, with Australian shares outperforming fixed income by 8% in this short space of time.

I have to think that with Australia’s economy still mixed, the sell-off in in domestic bond markets is largely done.

I would think that 10-year yields cap out short of 3% for the coming 6 months as investors take stock of our indifferent employment picture and the more broad realization that Trump’s policies are highly unlikely to have any material impact on Australian economic growth.

It’s interesting actually that European share-markets have failed to see much upside post-Trump, and this in spite of the tailwind to growth provided by a 6% fall in the Euro.

The Italian referendum is due next weekend and the press remain cautious as to the spillover to Europe from Trump’s anti-establishment momentum.

Shares

In shares this week we were pleased to see a 12% rise in Crown Resorts (CWN) and an 8% jump in QUBE Holdings (QUB).

CWN has rebounded from the particularly cheap levels we flagged last week, supported by renewed optimism on Macau gaming volumes. We still think the de-merger of CWN’s Australian gaming assets will be a positive catalyst for the share, and capable of taking it back through $13 early in the new year.

QUB rebounded this week from oversold levels, and we were comforted by the groups guidance that earnings in 2017 would rise even in spite of the sluggish economy.

Again it feels like we are waiting for Godot, but confirmation of final investment approvals for QUB’s Moorebank project will be a blessing when they land.

Macquarie Bank (MQG) – on the radar

It’s probably worth flagging that we have spent quite some time this week looking at MQG within the context of new policy implementation under Donald Trump’s presidency.

For those that don’t know, MQG is the largest infrastructure investor globally and a force to be reckoned with on the investment banking side in that sector also.

We think MQG stand to benefit from the likely boost to private sector infrastructure investment under Trump.

Furthermore, MQG ought to benefit on the trading side from a likely repeal of US laws (Dodd-Frank) prohibiting banks from making speculative trades with the use of their capital base.

The combined effect of these two stated polices stand a real prospect of augmenting MQG revenues in the years ahead, and the fact MQG earn over 70% of revenues from offshore markets will also be a neat tailwind for Australian shareholders.

Watch this space on MQG.

Small Caps – another heads up

Another nod to potential changes from us in the weeks ahead relate to Australian small-cap stocks.

We have felt under-represented in this part of the market for the last few years, and are keen to redress this. That said, as I have flagged on several occasions during the year, small-cap companies had seen strong buying during Q1 & Q2 to the point where we felt valuations had run ahead of themselves.

In the last couple of months however, Australian small-cap companies have underperformed their larger peers by over 10% and we are looking closely at trying to use this pullback as an opportunity for clients to start adding exposure to this part of the market.

Again, watch this space.

Have a terrific weekend all.

 IndexChange%
All Ordinaries5558+141+2.6%
S&P / ASX 2005494+147+2.7%
Property Trust Index1309+31+2.4%
Utilities Index7259+277+4.0%
Financials Index6207+108+1.8%
Materials Index9848+480+5.1%
Energy Index8963+515+6.1%

 

Key Dates: Australian Companies

Mon 28th November    N/A

Tue 29th November     Div Ex Date: AGLHA, ANZPA, WBCPD

Wed 30th November   N/A

Thu 1st December       Div Ex Date: NABPB

Fri 2nd December       Div Ex Date: NABPA

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