ASX Weekly Wrap 12/12 - 16/12

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.

The end result for the week pretty much summed up the excitement. As the market starts to wind down for the festive period we finished down -27.7 points or -0.50%. Our high was 5,595.7 on Wednesday and our low was 5,510.0 today. Another quiet week in terms of the quantity of data/news out but there were some very important points to take in.

As expected, Thursday morning our time, The US Fed raised their official cash rate by 25bps to 0.75%. Only the second lift in over a decade. This was pretty much expected and priced in by markets around the world. However the Fed surprised us by declaring it expected 3 rate rises in the official rate in 2017. This is one more than the two expected, and priced in by the markets. As a results markets sold off and the US dollar strengthened. In fact the DXY, the official US Dollar Index, now sits at a lofty 102.24. A level we have not seen since October 2003 and well off its lows of around the 70 mark we saw mid-2007.

We also saw the yields in US Treasuries jump considerably during the night. The 10yrs have hit a yield of 2.60%. The first time they have been above 2.50% since October 2014. It was only a few months ago that the yield was 1.75% and threatening to breakout. The move in the Treasury yields and subsequent sell off in Bonds has been massive and an important stage in modern economic history. As I wrote about all those months ago the rhetoric has changed dramatically. One from relying on monetary policy to stimulate economies to that of a fiscal stimulus where governments now need to pick up the slack and spend to get things rolling again. Maybe, just maybe, this was the perfect storm for Trump and what has enabled him to win power. The timing meant he could rely heavily on fiscal stimulus to promise Middle America jobs and tax breaks and improve their overall quality of life. Sticking with Trump, Fed chair Janet Yellen noted that the acceleration in rate moves next year had nothing to do with Trump and his inflationary policies. She noted it was too early to make a call on Trump as they didn’t know what shape his policies would end up taking. Instead she said it was down to the overall strength in the US economy, in particular jobs growth, and fair asset prices, that lead to the unexpected extra increase in 2017. Whilst some of what she has said is true you can’t help but think Trump must be in the back of their minds. The Fed has done a good job of being proactive over the last 18 months so one would have to think they are still being proactive here and anticipating Trump’s inflationary policies.

Just before I finish the segment on rates and Treasuries I want to look closer to home at the Australian Treasury rates. I will note after an initial sell off in yields last week, after the weak GDP figures, the Australian Treasury yields have bounced back. The 2 year now sits at 1.85% up from 1.75% and the 10 year is at 2.92%, up from 2.80%. I think we will see these yield slowly creep up as data continues to improve here. I am of the strong opinion that our next rate rise is still up.

Australian jobs numbers were released yesterday and showed much improved strength after a few months of weakness. Overall Australia added 39,100 jobs for November. This was much higher than the anticipated 17,500. The unemployment rate increase to 5.7% mainly due to the participation rate increasing to 64.6%. The breakdown of the jobs report is even more encouraging as we saw 39,300 full time jobs added whilst we saw 200 part time jobs lost. We also saw the underemployment rate fall to 8.3% from 8.7% a month earlier. This the lowest it has been since August 2015. Couple this with the recent strength in retail numbers and you can see a solid and improving Australian economy.

Just quickly China released a few economic data points on Tuesday which again showed further strength in their economy. Retail sales grew +10.8% year on year and well up on the +10.1% forecast. Also Industrial production increase +6.2%, also beating forecasts for a +6.1% rise. I am very encouraged by the continued improvement in economic data coming from China. It could give Australia that real push it needs into 2017/18 and help us grow above trend.

Oil had a great start to the week when it was revealed over the weekend that OPEC had been able to convince non-OPEC nations to cut production by 600,000 barrels per day. We saw Oil jump to over $54 for the first time since July last year before coming off again after the Fed rate decision and strength in the US dollar. It sits at a healthy $51 at the moment and has some very bullish signals sitting behind it on a fundamental basis. First we have OPEC and non-OPEC nations looking to cut roughly 1.8mill barrels a day of production. Next we also had Trump appoint the ex-head of Exxon Mobile as his Secretary of State position. I don’t know about you, but to me this has to be bullish for oil as he is going to be in favor of getting that oil price back up and boosting the US oil industry. Being Secretary of State will give him the powers to do that on an international basis. That breakout on the price of oil is still yet to happen considering the attempt this week failed, however I would still expect a breakout in the first quarter in 2017.

It looks as ugly as you can get for Gold as you can see from the chart above. It broke below its first uptrend (blue line) this week and now sits at $1,127 an ounce. To me this means it’s headed towards that next upward trend line in green sometime in 2017. It may bounce back up to hit the underbelly of that blue line first, but then it should roll over and come off. As I have said for some time now, rising rates are Gold’s worst enemy as investor jump out of the so called ‘safety’ of gold, which doesn’t yield by the way, and into US Bonds where yields are improving by the day. US Bonds, apart from cash, are considered the safety asset class in the world. Hence if they start to give investors a decent return then there is no real reason to stay in Gold.

There was only a real small dribble of corporate news around this week as everyone has started winding up for the Christmas break. A new takeover bid came in for Tatts (TTS) from a Macquarie Group lead consortium. It values TTS at somewhere between $4.40 and $4.50 a share as opposed to Tabcorps (TAH) $4.34 per share. Obviously TAH will have to improve theirs to win shareholders over and a bidding war is always healthy for those who own the company who is being taken over. There is a lot more to come from this I expect. Don’t rule out a third bidder, maybe an International.

It just keeps getting worse for the baby formula company Bellamys (BAL). They went into a trading halt the end of last week to clear up their financials and impact of Chinese troubles on their earnings. Now they have gone into a suspension as they need more time to get things right. Word is the ASX isn’t happy with their continuous disclosure obligations and there could be further to come of this. It also was announced there is a class action being put together by Slater & Gordon of shareholders looking for compensation. If it’s found they did not meet their continuous disclosure obligations they could be out of pocket a bit of money. What doesn’t look good was their CEO sold $2.3mill of stock around the $14.50 mark back in late August this year. There is a possibility she may have known about financial troubles back then, which could land her in a lot of hot water. Keep a close eye on this one.

Final bit of corporate news comes from Santos (STO). STO announced on Wednesday a $1.5bill capital raising at $4.06. The majority of it, $1bill, they had been able to place with institutions and rest was to be offered to shareholders, but was fully underwritten. The market was a bit perplexed by this announcement as it wasn’t expected at all and hence sold off STO shares by 10%. The company notes it will use the funds to strengthen the balance sheet, pay down debt and help it take advantage of a growing gas market. The stock is now trading below the offer price of $4.06 at $3.93 so one would have to think not many shareholders will be keen to take this offer up.

Well that’s it for another week. Shorter than usual wrap due to just the lack of news out there. Not unusual for this time of year. Absolutely nothing of note released next week, so as a result this will be my last Weekly Wrap from the year. The market is absolutely dead between Christmas and New Year’s so there will be nothing to write about then either. Over the next couple of weeks I will put together my Wrap for 2016 and a look ahead towards 2017. It will more than likely come out in the first week of the New Year. It will be quite lengthy and summarise the major events of 2016 and what moved markets. A look back on the outperformers and underperformers and a quick peak into 2017 and maybe what we can expect for the upcoming year.

A quick heads up on the trading hours for the market over the next couple of weeks:

- Friday 23rd December 2:10pm (EST) Close

- Monday 26th & Tuesday 27th December Closed

- Friday 30th December 2:10pm (EST) Close

- Monday 2nd January Closed

Every other day, apart from those listed above, the market is trading normal hours. Personally I will be here throughout. I am not going on holidays, so as long as the market is open I will be available as per usual.

Christmas and the New Year is not only a great time to reflect on your portfolio and trading strategy, but also on the more important things in life. It’s a great time to reflect and to be grateful for all you have in life from family, friends, wealth, and employment to simply having a roof over your head and a warm bed at night. There are so many out there who are far less fortunate and whilst we worry over the next major market event there are those who will worry where they will get their next meal from. Australia may be the lucky country, but there are some that are not so lucky. I feel this gets lost sometimes as we all get wrapped up in our lives, myself included. Just something to think about over the festive period.

To my clients, and anyone else reading this, I wish you all a very Merry Christmas & a Happy and Safe New Year. Thank you for your continued support throughout 2016 and I look forward to continuing our relationship throughout 2017. Please remember to look after yourself over the festive period and come back to us safe and sound in the New Year.

I hope you all have enjoyed my weekly notions on the markets in 2016 and I look forward to continuing them in 2017. Until then take care.

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.