ASX Weekly Wrap 10/10 - 14/10

Welcome to the ASX Weekly Wrap. A weekly email that will be sent out to clients, and also made available on my website, with a brief description of the events that moved the local markets during the week and also what I am watching on an individual stock level. Feel free to provide feedback and alert me to any topics that you may want covered.

It was a fairly quiet week for individual stock news as it was dominated by macro factors, especially late in the week. As a result we traded in a very tight range of only 73.9 points. The market ended up peeling off 33.4 points or 0.61% for the week. Our high was 5,494.70 on Monday and our low was 5,420.80 yesterday.

The only major data this week came out of China on Thursday and Friday. Thursday saw China’s September trade balance released which was a major miss on forecasts. The trade balance itself was $US41.99bill, which is the smallest since March and undermines what we thought was a turnaround in the economy. Exports fell 10% and imports, after rising in August, fell 1.9%. It’s not all doom and gloom though. The Chinese Yuan is partially responsible for the fall in exports as it is now down 5.5% v USD since the start of the year. On the flip side imports are also down due to lower commodity prices compared to last year. In a boost for the commodity markets we saw oil, iron ore and copper volume imports all rise 14%, 9.1% and 11.8% respectively against 2015 numbers. Obviously the rise in volume of imports isn’t enough to offset the large falls in prices we have seen in that time.

Today we had Chinese CPI and PPI numbers released which saw a strong beat on forecast in both. Chinese CPI rose 1.9% year on year vs a forecast of 1.6%. We also saw PPI rise 0.1% year on year vs a forecast of a decline of 0.3%. This is the first time PPI numbers have accelerated in 5 years on a year on year basis. Last time they did this was in January 2012. Both sets of numbers suggest that inflationary pressures are building. This further enhances the view I spoke of last week that cash rates had bottomed and that inflation was likely to build going forward. It also means that the all import Chinese Q3 GDP figures, released next week, could surprise to the upside as prices are much higher than expected. A big contribution to the CPI/PPI increases, like the trade balance, can be attributed to the Yuan falling against the USD. Overall though these are encouraging signs for China and the world economy.

Following on from the Bradken (BKN) takeover offer from last week UGL received its own takeover bid from Cimic (CIM), the old Leightons, on Monday. UGL stock shot up 48% to $3.18 on the back of the $3.15 offer. It seems there may be a bit of a theme developing within the mining services/engineering stocks. It may be the case that companies are starting to see value in these Australian stocks as they have been sold down hard from their pre-GFC highs. It also shows massive confidence in the resources sector and that just maybe we have bottomed out and are turning back up. Will be interesting to see if the theme continues and if any other parties come to the table on BKN/UGL, or any other mining services company. In my view it’s a bullish move for the sector and mining stocks in general.

Chart Courtesy of Asenna Wealth

There was a bit of action in the commodity space this week. Oil was able to hold onto gains it made last week as it sat above the $50 mark. The talk around oil has changed over the last few weeks. It has gone from how much oil can we pump out to possible production cuts from OPEC nations and even maybe Russia. We haven’t seen an actual concrete plan put into place yet by OPEC nations, in regards to that 750k cut talk of a week or so ago, so until that is put into place the market will continue to be skeptical. As you can see from the chart above oil is trying to reclaim the long term trend (horizontal green line). If it can do this than $60 would be the next short term target. The short blue line represents a line of resistance set by the previous two failed attempts to reclaim the trend. If it can’t claim this it is extremely bearish.

Natural Gas prices have also started moving in a bullish direction since the start of October. They have risen from a low of $2.90MMBtu to a high of $3.35MMBtu last night. That is almost a 16% rise in two weeks. I prefer LNG over oil mainly due to falling supply (after 2021), a forecasted major increase in demand and the fact for nations like China it is a clean and affordable solution, over coal, for their energy problems. The chart below depicts a better picture of LNG moving forward.

Chart Courtesy of Asenna Wealth

Gold has been able to hold the $US1,250 mark this week as the talk of rising rates has tempered the enthusiasm of the Gold bugs of late. Gold is looking to break the longer term downward trend (green line) whilst at the same time holding support at the $1,250 figure (red line). The Gold bulls will want to see it squeeze into the wedge formation with an eventual break upwards of that LT trend. If it happens to go the other way then we could see the $US1,000 an ounce mark of Gold again.

The big talking point of the week, and of the last few months, surround coking coal. After seeing lows of around $75/t in May this year Coking Coal has had a spectacular run of 260%+ to $200/t. It is thought coal alone could reduce the Australian trade deficit and put us in surplus by itself due to these price rises. Reasons behind its massive run are thought to be three fold. Its said to be a combination of increased Chinese demand, via increased infrastructure spend, mine closures and supply disruptions. Coking coal prices are extremely volatile so whilst this rise may not be sustainable it also indicates that perhaps it was grossly undervalued in the first place. All in all it’s a boost for the Australian economy as Coal represents a large portion of our exports.

Obviously the bullish movements in Oil and Coal prices are a huge boost for companies like BHP. If both commodities are able to maintain current prices or even see them go higher we may see earnings upgrades/forecasts for BHP. I know I told you all I was waiting for a correction in the prices of BHP, RIO and FMG, but for now, I’m not sure we will have the luxury of that. Things can change quickly though so its important to stay vigilant.

I wont bore you with the technicals of the XJO this week. There hasn’t been much change from last week except we may pull back to the underlying bottom trend line again before our next move up. However we are looking to again put in a higher low before that final push to 5,700. We may have to wait until the Nov/Dec Santa rally before we get this.

We still have a close eye on the US 10yr Treasury yields which peaked at 1.78% during the week but pulled back to the 1.76% mark it now sits at. As I stated last week a break of the 1.75 yield would see us move towards 2% over the coming weeks. This still holds very true and it looks as if we are well on our way as Bonds continue to get sold down as the expectations that rates have bottomed and will continue to rise, espcially in the US. We had two members of the Fed speak during the week. Both mentioned how close they were to increasing rates in September and that the board remained very hawkish regarding rates. Its still most likely we see rates rise after the election in December but given the closeness of the vote last month October is in play.

Absolutely HUGE week for economic data next week as we have the release of Chinese Q3 GDP data plus retail sales, industrial production and asset investment. We have US retail sales out tonight and the head of the Fed, Janet Yellen, also speaking. US CPI, industrial production, housing starts and home sales are also out next week as well. Domestically we have Unemployment and business confidence out Thursday. We also get quarterly production reports from WPL, FMG and RIO. Going to be a busy one next week!

I hope you are all getting out and enjoying this summery weather while it lasts. Think the rain sets in again on Sunday and Monday. Will be spending my weekend out in the garden plus catching up with family and friends. Also the Caulfield Cup will be run tomorrow. Outside of the favourite, Jameka, I really like Sir John Hawkwood. Add in Real Love for the Trifecta. May have a cheeky bet there. Have a great weekend all and I will speak to you next week. Go Crows!

- Heath Moss

heath@hlminvestments.com.au

0413 799 315

Important Notice

Any advice in this article should be considered General Advice only and does not take into account your personal needs and objectives or your financial circumstances. You should therefore consider these matters yourself before deciding whether the advice is appropriate to you and whether you should act upon it. I am happy to assist you in this process. To do so, I will need to collect personal and financial details from you before providing my recommendations. Please note the author may own shares in the companies mentioned in the above blog.