ASX Weekly Wrap 21/11 - 25/11

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.

In what was a very quiet week for company and economic news the XJO was very strong. The XJO ended up 148.4 points or 2.77% for the week. Our high was 5,520.90 today and our low was 5,334.90 on Monday.

Will be a very short wrap this week as there was literally nothing of note to speak about really. The market rallied on Monday – Wednesday on the back of strong commodity prices, in particular Iron Ore, Oil and Copper. BHP ($26), RIO ($60), FMG ($6.20), and WPL ($31) all rallied to 12 months highs on the back of this. To me it now looks as if the resources sector has become too hot and some steam needs to be released. Will looking for a decent pull back on resources as the USD rallies into the fed decision next month.

The yield play was back in focus as interest rate sensitive stocks regained some of their lost ground rallying anywhere from 3-5% for the week. When I talk about interest rate sensitive stocks I’m talking the likes of TCL, SYD, APA, WFD etc. Those companies where higher rates will have a larger than usual impact on their bottom line. A few of them broke their downward trends, which was nice to see. We need them to consolidate here now before the next move up.

Finally banks were also very strong with the prospect of higher rates around the corner it will help increase earnings in years to come. I would still expect banks to have to cut dividends next year. Most sit on a payout ratio of 80%+ which is historically too high. Normally they sit in the 70-80% range, so unless there is a large lift in earnings, which is doubtful in the next 12 months, then dividends will have to be cut to a more sustainable rate. Don’t be too alarmed though as they will all still yield around that 6% mark which is a great return regardless.

The AUD slid to roughly the 73c mark as a rate hike in December, in the US, is now priced in at a 100% certainty. It is also now expected that we will see 2.6 hikes by the Fed through to the end of 2017 and 4.3 hikes through to the end of 2018. Once again we have been talking about the changing rhetoric and how rates have bottomed globally now for some time. The US will lead the way for rate rises in the coming years but I would expect Australia to follow soon after. My thought is a late 2017 early 2018 rate hike domestically will be on the cards. My thoughts are as the AUD continues to sink and commodity prices are sustained at current levels, or even if they rise, this will create an inflationary environment. This will then force the RBA’s hand. Now some will have you believe rising interest rates are bad for equity markets. Well this is simply not true. They may have a short term negative effect surrounding the actual hike but overall it’s very positive for markets. The data below tells the story:

As you can see from the chart above rising rates have been very kind to the S&P 500 in the US. When you think about the reasoning behind it, it is really quite simple. Rising rates means there is rising inflation. Rising inflation means there are higher prices. Higher prices means there is increased demand. Increased demand means there is higher company earnings. Rising rates are in fact, in most cases, an indicator of a healthy economy and increasing company earnings.

Speaking of rates we saw the yield on the US 10yr Treasuries hit 2.40% this week as bonds continue to be sold down. The highest yield we have seen on them since July 2015. They have settled back down to around the 2.35% mark and I would even expect the yields to come off more before their next leg up but this 100bp move we have seen in bond yields is something we haven’t seen since the 80s.

Gold is looking in a bit of trouble here as you can see from the above chart. Still trading in that downward trend signaled by those red lines. It needs to hold that light blue upward trend line it started in mid-2006 which is roughly 1,150-60. If it can’t hold that then it will fall to the longer term trend line in the dark blue which is around the 850-900 mark. For now Gold is a wait and see how it plays out. We should see it test that light blue line in the next week or so.

Oil seems to be in a much better place. It’s still trading below the longer term trend (green) but forming a solid wedge. It does look like it’s a chance to break above that longer term trend, but once again it’s a wait and see. OPEC is still yet to announce any formal cuts and we have a meeting scheduled for Wednesday night our time next week. There have been some positive comments from Iraq and Russia about supporting cuts over the last week, but we won’t believe anything until we see it.

Technically the XJO is behaving itself for now. It has maintained its longer term trend (blue line) but has a shorter term downward trend (red line) to contend with. We again hit that this week around the 5,500 level and I’d expect us to reject it and pull back to the longer term trend around the 5,250 mark over the next few weeks. I can see us trading in that small triangle there made by the red and blue line before a break out to the upside. I can’t see us breaking that downward trend this time as we do look a little stretched. Going to put my cred on the line here but if we do break that short term downward trend and rally early next year we could see the market hit approx. 6,200 in the second half of next year. There is a lot of water to go under the bridge yet, but I feel there are a few fundamentals lining up for equity markets to see such a rally.

Have a busier week next week for data as OPEC meets Wednesday night our time to decide on production cuts. Chinese manufacturing and services PMI is out on Thursday and Australian retails sales for October are out Friday. VOC, which many of you hold, will have its AGM next Tuesday. Market will be looking for earnings guidance considering the bearishness that has surrounded the telco industry of late.

Not much on this weekend personally. May get started on that Christmas shopping. The test match v South Africa is on at Adelaide Oval, but I doubt I’ll be able to get to that. Lawns desperately need a mow so I dare say that’s on my to do list. Whatever you are up to this weekend stay safe and enjoy yourself. Go Crows!

heath@hlminvestments.com.au

0413 799 315

PO Box 6014

BURTON SA 5110

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.