Weekly Market Update – 14 September 2020

Tech… again

Volatility was once again the flavour of the week.

With US markets closed on Monday for the Labor Day holiday one could be forgiven for thinking price action may have been somewhat muted. However, this quickly proved to be anything but the case with equity markets clearly devoid of any strong direction posting gains one day and losses the next.

US tech stocks once again drove the market lower.

The NASDAQ fell -4% on Tuesday, rallied nearly +3% on Wednesday before fading a further -2% on Thursday and Friday.

Much of this weakness can again be traced back to the FAANG stocks which continue to see profit-taking.

Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Google (GOOG) all fell between -4% and -7%

Tesla (TSLA) which last week saw its shares surge +20% on the back of a stock split and $5bn share sale fell -10% after the electric-vehicle maker missed out on being included in the S&P 500 Index. Investors had assumed its inclusion in the benchmark would generate significant inflows from passive investments with those who purchased stock now having to wait until the TSLA ‘Battery Day’ on September 22 for the next positive catalyst.

The ongoing arm wrestle between investors trying to gain exposure to high quality tech stocks and traders using some of these sharp rallies to take profit continues to underpin this lack of conviction.

With the FAANG index trading on an earnings multiple of 54x which increases to 60x for the wider tech sector there is significant growth priced in which leaves the door open for disappointment or downgrades should expectations not be met.

It is precisely this reason why we remain cautious.

US inflationary data released on Friday came in higher than expected with the Consumer Price Index (CPI) rising +1.3% on a one-year view, an increase from +1.0% in July. Core inflation which strips out volatile costs such as fuel rose to +1.7% benefitting from the gradual reopening of the US economy.

Despite the uptick Federal Reserve policy makers see little threat to inflation overshooting with the Federal Reserve meeting this week set to hold interest rates steady.

Elsewhere, oil prices fell -6% after US crude stockpiles rose 2 million barrels last week on the back of six consecutive weeks of declines. Concerns over China’s capacity to continue purchasing record amounts of crude and Saudi Arabia’s intention to reduce pricing saw oil prices fall to near three-month lows.

Rising stockpiles and stalling demand will be the major focus when the market monitoring panel of the Organisation of the Petroleum Exporting Countries (OPEC) meet later this week.

We currently have no exposure to oils in our portfolios having sold Oil Search (OSH) and Woodside Petroleum (WPL) in April this year as coronavirus lockdowns impacted demand for oil from both the automobile and airline industries.

More stimulus on hold

On Thursday Senate Democrats blocked the $300bn Republican coronavirus stimulus package.

Whilst not unexpected, given the Democrats had previously sought a $3 trillion bill, the outcome weighed negatively on markets with the S&P 500 falling -2.5% for the week.

With the stimulus package failing there remains little hope of Congress passing a relief deal before November’s election which is cause for concern.

The high number of Americans filing new claims for unemployment benefits indicate that the recent labour market recovery is losing momentum with 884,000 workers filing for unemployment compensation last week and claims from individuals filing for at least two weeks increasing to 13.3 million.

Brexit Treaty Breakdown

The GBP was the worst performing major currency last week falling -3.6% against the USD and AUD on the back of rising tensions between the UK and the EU.

UK PM Boris Johnson’s plans to amend part of the Brexit withdrawal agreement reduced confidence in the likelihood of a deal being finalised by October 15 with the EU warning the UK could face legal action for the proposed changes which undermine the treaty signed last year.

A key component of the withdrawal agreement was designed to prevent a hard border returning to Northern Ireland which would allow the UK to modify rules relating to the movement of goods between Britain and Northern Ireland.

Given this is in clear breach of the signed treaty amending the bill will be regarded as a violation of international law and bring further uncertainty to the Brexit deal.

Australia in review

The ASX fell -1.3% with energy stocks faring worst down -5% impacted by declines in the price of oil.

Australian business conditions weakened sharply in August with NABs business confidence survey highlighting business concerns over hiring.

Forward orders weakened and capacity utilisation edged lower (and remains very low) – and alongside the weak level of confidence, suggest that conditions may deteriorate further.

An improvement in Covid-19 case numbers in Victoria provided some relief with forecasts having been worse, however a deterioration in the employment index suggests that while the economy has begun to open up, the labour market is still weakening.

Westpac consumer confidence numbers presented a similar picture with the index bouncing +18% in September boosted by improving conditions and the absence of a second Covid-19 wave in states other than Victoria.

The rebound means the Index is now just 1.6% below the average over the six months prior to the emergence of COVID-19 in March.

This week central bank news will dominate proceedings with the Bank of Japan, Bank of England and Federal Reserve meetings all set to take place and locally the RBA minutes tomorrow and unemployment data on Thursday.

We remain cautious ahead of the US election in early November as the polls continue to indicate a very tight race. Given the vastly different policies the Republicans and Democrats intend to introduce and the likely impacts these will have on different segments of the market we believe it is prudent to hold cash which we will look to invest once some of the volatility comes out of the market.

For the time being we remain overweight cash in the Australian Equity, Defensive Income and International Equity SMA portfolios.

Looking ahead

Monday 14th – Friday 18th September

  • Monday: N/A
  • Tuesday: AU RBA Meeting, Q2 House Price Index
  • Wednesday: AU Westpac Leading Index (AUG), US Federal Reserve Meeting, Retail Sales (AUG), Housing Market Index (SEP)
  • Thursday: AU Unemployment (AUG), US Building Permits (AUG)
  • Friday: UK Retail Sales (AUG)

Friday 11th September, 5pm values

 IndexChange%
All Ordinaries 6039-170-1.1%
S&P / ASX 2005858-68-1.1%
Property Trust Index1277-131.0%
Utilities Index7059-107-1.5%
Financials Index4563-71-1.5%
Materials Index13908+134+1.0%

Friday 11th September, closing values

 IndexChange%
U.S. S&P 5003341-86-2.5%
London’s FTSE6032+233+4.0%
Japan’s Nikkei23406+201+0.9%
Hang Seng24503-192-0.8%
China’s Shanghai3260-95-2.8%

Key dividends

Monday 14th – Friday 18th September

  • Monday: Div Ex-Date – Chorus Limited (CNU), HUB24 (HUB) Tassal Group (TGR), WBCPE (WBCPE); Div Pay-Date – Computershare (CPU), Mirvac Group (MGR), Nickel Mines (NIC), VGI Partners (VGI)
  • Tuesday: Div Ex-Date – ANZPE (ANZPE), ANZPF( ANZPF), News Corporation (NWS), Div Pay-Date – CBAPD (CBAPD), CBAPE (CBAPE), CBAPF (CBAPF), CBAPG (CBAPG), CBAPH (CBAPH), CBAPI (CBAPI), Lendlease (LLC), Mineral Resources (MIN) Qualitas Real Estate Income Fund (QRI), Spark Infrastructure (SKI)
  • Wednesday: Div Ex-Date – Costa Group (CGC)
  • Thursday: Div Pay-Date – Ansell Limited (ANN), NABPB (NABPB), NABPF (NABPF), REA Group (REA), Rio Tinto (RIO)
  • Friday: Div Ex-Date – Qube Holdings (QUB) Div-Pay Date – WBCPI (WBCPI), Woodside Petroleum (WPL)

Contact

Mark Johnson – Chairman of Investment Committee(03) 8825 4738
Guy Silbert – Investment Manager(03) 8825 4750
Jordan Lisle – Dealer & Research Assistant(03) 8825 4749

If you would like to discuss your situation, please speak to your adviser or email clientservices@primefinancial.com.au

Mark JohnsonT: (03) 8825 4738Cameron MorcherT: (03) 8825 4737
Livio Caiolfa T: (03) 8825 4748Michelle BromleyT: (03) 8825 4751
Marcus AingerT: (02) 9134 6292Nicole LewisT: (03) 8825 4734
Dylan CresswellT: (03) 8825 4707Garry FrizzoT: (07) 4019 2410
Michael CooperT: (07) 3010 8597Nicholas MillerT: (03) 8825 4722
Jarrod RoddaT: (03) 8825 4729Romeo AbdoT: (03) 8825 4732

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

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