Australian Market Summary (Issue 457) – July 14th, 2017

14th July 2017, 4pm

Well, it was another random week.

Where mid-week things were looking considerably dicey, as I type now at Friday lunch time, things look surprisingly chipper.

Where you might be reading in the press that equity market volatility is extremely low (certainly in the U.S that is the case), in fact in Australia it is slowly rising and even more so, intra-day volatility is on the rise.

Australia is regularly rising and falling by 1% or more on a day by day basis, and yet the ASX200 has traded a tight 6% range year-to-date.

This demonstrates to me an increased uncertainty from investors as to future market direction.

Though our market looks a little fully-priced, it can’t sell-off until more broadly until it takes a lead from larger U.S and European share-markets.

But equally, the rather fully-priced and one-dimensional domestic Australian equity-market can’t push higher in the way other markets are because Australian economic growth is lagging and also because of the narrowness in industry exposures here.

Where the U.S, German and Chinese share-markets are all up 9-10% or more year-to-date, Australia is up less than +2%.

So, the lack of direction has made it tough.

Grey Clouds emerging, but yet to impact.

More curious to me this week was the U.S market’s reaction to both a) Donald Trump Jnr’s meeting with the Russian lawyer, and b) the remarks made by Federal Reserve Chairwoman Janet Yellen.

In both instances my initial reaction was one of hesitation, but on both occasions the market shrugged off the news, even in the case of the Yellen remarks the spin from the press was a positive.

On Trump Junior’s meeting with the lawyer, my reaction was that this further raises the stakes over the potential for mistruths. In a really simple sense and at its most basic, the ongoing investigation is surely casting further doubt over the President’s judgment, and hence is running increased risk of alienating his supporter base and those Republican’s on Capitol Hill needed to support his tax and healthcare reforms.

Undeniably, the agenda for policy reform that Trump had laid out has been waylaid and stands to be further delayed in light of the ongoing investigations.

This matters in the sense that much of the spike in consumer confidence that emerged post Trump’s election was triggered by expectations for tax cuts across middle-America.

The more distant the tax cuts seem, the more consumer confidence will wane.

Already in the last month, Bloomberg’s measure of weekly consumer confidence (chart below) has tapered away to be back at a 6-month low, and this will surely lead the more widely recognized confidence data from Michigan University (due tonight) and the Conference Board (due on July 26th).

Chart 1 – US Weekly Bloomberg Consumer Confidence tails off

A sustained decline in consumer confidence will bring equity markets back, without a doubt.

As to the comments of note from Janet Yellen’s Congressional testimony this week, markets seemed to take heart from her rather dovish take on the outlook for inflation, and here still measured attitude to interest rate hikes.

Most market pundits saw this testimony as bullish and supportive of the view the Federal Reserve aren’t in a rush to tighten rates.

Fair enough too, but this is already known and anticipated by the market. In fact, fixed-income markets are pricing in barely one further interest-rate tightening from the Federal Reserve over the coming year, which is still way under the internal projections from Fed Governors themselves who are pointing to a further two to three hikes over the coming year.

Perhaps of more interest to me this week was the remark by Yellen that the Federal Reserve balance sheet would not be used as an ‘active’ policy tool going forward.

What this means to my mind is that the Fed are set on a course to reduce the size of their balance sheet irrespective of small changes in the economy, and hence we should expect a steady continuation of liquidity withdrawal from asset markets from the Q4 onwards.

Like I endeavored to explain last week, the decision to reduce the Fed’s bulging balance sheet will have significant ramifications for asset market pricing in the years to come as the world’s largest buyer of bond markets (the Federal Reserve) turns seller.

Bond yields ought to rise as the Federal Reserve exit the market, and this will have the knock-on effect to other asset markets like equity and property etc.

Anyways, the point of it all is that the markets seemed to take these two separate data points in their stride, in spite of the negative connotations from both.

But that’s by the by.

I feel increasingly convinced that not only will market’s increasingly pay attention to the looming impact of delayed Trump policies, but also to the slow creep higher in U.S bond yields.

The Australian Dollar – higher still

The AUD is another topic of conversation today since it is now well through 77c and at its high for the year.

The strength in the AUD is somewhat of a surprise to me, particularly given the soft Australian consumer and construction outlook, however much of the explanation for Australia’s surprising currency strength can be as easily attributed to the fall in optimism for U.S dollars.

Keeping it simple, since the start of the year much of the market’s optimism for U.S economic recovery and potential reflation has dissipated as Trump’s reform agenda has been derailed and this has led to an unwind of US dollar positions.

At the same time, Australia’s corporate recovery has continued apace.

This week we saw the National Australia Bank business survey report that business conditions had improved to their best level since the GFC.

Chart 2 – NAB Australian Monthly Business Conditions Survey

This and other data from Australian business make it very difficult for the RBA to offer a deeply levered Australian consumer any respite from creeping living costs and tighter bank lending conditions.

So the AUD is 77c, and to my mind, still far too high to offer any genuine productivity support to an economy that will soon be seeking respite from the impact of a housing slowdown.

Bank Hybrids stronger

Another observation this week is to acknowledge the rally seen across the bank hybrid space in the past month.

Across the board, bank hybrid issues have seen excellent price performance and the sector on a whole is now back to a fair value, bordering on slightly full.

Even the monster $3bn issue of CBAPD’s which were priced at the last peak in hybrid pricing (back in October 2014) are now back within striking distance of their $100 issue price (they are $97.80 today) having not at any point since listing traded there.

Stocks & other news this week

Oil stocks rebounded this week as oil prices took heart from a reversal in the massive build in US oil inventories.

ANZ (ANZ) were seen to be nearing the sale of their stake in Malaysian bank AMMB for approximately $900m. When added to the pending $4bn sale of ANZ’s life insurance and wealth businesses, ANZ will likely be in a position to buyback shares as a means to offset some of the earnings dilution felt from the sale of these profitable divisions.

Cryptocurrencies (bitcoin, ethereum etc) continued to fall this week. Bitcoin is now almost -20% from its highs amid increasing division over its direction.

There are some great articles on this on for those that are interested.

Anyways, that’s probably the lot.

Stay patient. Plenty of opportunities will arise in the months to come.


Jono & Guy

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14th July 2017, 4pm

All Ordinaries 5816 +93 +1.6
S&P / ASX 200 5774 +91 +1.6
Property Trust Index 1289 -3 -0.2
Utilities Index 8534 +89 +1.1
Financials Index 6563 +140 +2.2
Materials Index 10140 +209 +2.1
Energy Index 8784 +215 +2.5

Key Dates: Australian Companies

Mon 17th July Div Pay Date – MBLHB, MXUPA
Tue 18th July Div Pay Date – Betashares Ishares & Vanguard ETF’s
Wed 19th July N/A
Thu 20th July N/A
Fri 21st July N/A


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