ASX Weekly Wrap 06/03 - 10/03

All things considered it was an impressive week for the XJO. We had the resources and a lot of large stocks going ex-dividend weighing on our market and yet it was still able to put on 46 points or 0.80%. Our high for the week was 5,781.20 today and our low was 5,715.50 on Monday.

As stated above, and as I anticipated last week, it was another dull week for the XJO. With hardly any economic news out and no real company news of significance the market continued to drift down. Add on top of this we had a lot of the top 20 go ex-div, hence a lot of money was pulled from the market. I’d expect things to start picking up again after the fed meeting next week. I feel the US market is factoring in a rise and our markets here might just be re-adjusting too. Our 10yr Bond yields rose to 2.94% during the week. The highest they have been since August of 2015. This is suggests that markets are now factoring in for higher rates domestically. I still saw a major bank only two weeks ago forecasting two rate cuts here by end of the year. The marijuana stocks have been doing exceptionally well this week. Maybe they had been sampling some of their product?

Onto the economic news of the week which was few and far between. The RBA had its monthly meeting and as expected kept the cash rate on hold at 1.50%. However commentary surrounding the decision was more hawkish and I’d expect a small chance of a rise in Nov/Dec, but definitely a couple by end of Q2 in 2018.

Yellen spoke last Friday and night and as expected she signaled a March rate hike at next week’s meeting is likely. The markets are now factoring in a 100% chance of a rate hike at the March meeting. The US 10 year Treasury yields also recovered this week on the back of the rate speculation. A few weeks ago yields got as low as 2.35% to now sit at 2.61% as the bond sell off recommenced.

China’s trade balance for February was released on Wednesday and came as a shock to the market. China recorded a CNY 60.36 billion deficit as opposed to the CNY 172.5bill surplus expected. This was mainly due to imports soaring 44%+ and exports only increasing 4.2%. Forecasts were for a 23% rise in imports and a 14.6% rise in exports. A few factors have come into play here. Higher commodity prices and a weaken yuan are mainly to blame forcing imports up. Also the lunar New Year, at the end of January, would have forced many Chinese companies to restock as the country tends to shut down for a week as the festival is celebrated. It also tells me that the Chinese population spent up big during the lunar festival which is a bullish sign for the economic growth for the country. March figures should return back to normal.

It was an awfully quiet week for company news and events. Nothing of note really worth covering hence will probably be a reasonably short wrap this week. I will talk about sectors in general though.

The main weigh on the markets this week were resources. The index itself lost 3.3% with the main laggards being BHP & RIO along with a raft of gold stocks. This was obviously due to the Iron Ore price pulling back from the high of $94 to around the $85/$86 mark. I did expect some softness to come into the market at some point and that is what we got from the sector this week. BHP & RIO are both approximately 15% off their highs set in early February and have provided that pull back we were craving. I am happy in entering the stocks at these levels for long term holders or adding to existing positions. There could be some more downside so you may need to wait for it to consolidate before entry but I see a lot of value there. Both are now trading around 13x earnings and 12x forecast earnings. Most brokers have RIO target prices in the $70-$80 range whilst BHP has targets in the $26-$30 range. It is also noted RIO is yielding 4.3% on forecast dividends at current prices. BHP did go ex-dividend this week so current holders have picked up a 52c dividend for their troubles.

FMG fared slightly better this week, I feel simply because it is trading at that much lower multiple. It is still, however, off 16% from its highs having that pure Iron Ore exposure. FMG is only trading at 7.5x forecast 16/17 earnings and yielding 6% here, providing they match the 20c dividends they paid for their interim result. The risk is slightly higher on FMG compared to BHP/RIO as it is a single asset producer, but I feel the much lower PE accounts for most of that. Like BHP & RIO I am more than happy jumping into FMG at these prices. They did pay a 20c dividend this week so you do miss out there, but I am very bullish on the future at FMG.

The banking sector helped prop the XJO up the week as it put in 2.3% of gains. ANZ, WBC & NAB are all up 10% since early February and really have done most of the heavy lifting since then. CBA is up only 5% from recent lows but did report and pay a dividend during that time so a lot of money would have flowed from CBA into the other three. Barring CBA it looks as if the other three banks are breaking out, share price wise, and should run into earnings in early May. Generally they show some weakness after until after the September reporting season is finished. This is playing out exactly as I had expected as the sector now has showed signs of bottoming, from an earnings perspective, and are on the way back up.

Outside of the resources and banks there isn’t really that much to talk about this week. In the small/micro-cap space we saw a lot of cannabis stocks really take off this week. Some putting on 100%+ in just a few days. This was because the federal government issued the first official license to commercially grow and harvest cannabis in Australia for medical purposes. It’s a major step forward for the industry as most states are relaxing their laws as well. At this stage it is just for medical purposes and I don’t think we will go down the recreational path for some time.

Let’s talk commodities. There is a lot to cover. As I stated earlier Iron ore had a rough week as it fell from recent highs around $94/t to $85/t. This is mainly due to record stockpiles and lower steel production in China. This was to be expected at some point and we should see some further falls to old highs around $83/t. Hopefully from there is can consolidate for a while before moving up again. If it can’t then $70 is a real chance.

Oil also had a tough week unable to breakout above that $55 a barrel mark and eventually being sold down heavily as a result. Reasons behind the sell down were the fact Russia has failed to cut production as much as originally planned and US inventories and production are on the way back up again. Technically speaking it seems as if oil could fall to around $48 (blue line) and hopefully bouncing off that. The chart does still look attractive longer term as a nice wedge is forming. As long as it can hold that $48 it will be another higher low formed. It could then make its way towards that $55 level again (black line) before breaking out above that.

What I feel we are seeing in the oil market is a change of power. We had the Middle East, a few years ago, pumping out as much oil as they could. This forced the oil price a lot lower and it did see sub $30 at one stage. Their aim was to force most US Shale Oil producers broke. This failed, however, and it was only a handful who went to the wall. Others were able to cut production by shutting down higher cost wells and actually became more efficient and lower cost as it forced them to invest in better extraction and production technology. One major producer cited that in 2014 their cost of production was $46 per barrel. This has now come down to $29 per barrel and have only just fattened their margins. It’s at a point now where the Middle Eastern countries can no longer survive on lower priced oil themselves and need the price back up, hence we saw the cuts at the end of last year. I believe that we will see OPEC announce more production cuts within the next few months to keep that oil price above $50 a barrel. Thus we are now seeing a power shift to the US where they control production and the energy capacity of the world.

What we saw with US Shale producers is exactly what we saw here with our Iron Ore producers and is a common cycle for all commodities. When there is a glut in supply and prices are forced down this forces efficiency and investment into better technology. This brings the average cost of production down and makes the low costs miners even lower cost. It also knocks out a lot of the higher cost producers which brings supply back down and prices back up.

It’s the same old story for gold. Treasury yields and rates are on the rise and gold struggles to perform. Short term it looks as if it will test that long term trend line (blue) again around 1165/70. If it can hold that then things start looking better for the precious metal. It then gives itself the best chance it’s had in a while to break that long term down trend (red line). My thoughts are it won’t and it will reject the 1280 level and that will be its final nail in the coffin. It won’t be long after that I feel gold will see $900oz again.

The XJO as it stands now still remains very bullish. We look set to test that 5,800 again as soon as next week. As I have said on numerous occasions if we break 5,800 then 6,000 is the next step. I’d expect some digestion around 6,000 and a test back down to 5,800 again before eventually breaking through. I remain very bullish on the XJO from a technical and fundamental standpoint. It’s looking better than it has for some years.

Well as I promised a shorter than usual wrap this week. A better week data wise coming up as we have the US jobs figures out tonight. Expect them to be strong. The ADP figures, which are the private sector numbers, came in well above forecast in +298k. I believe forecast was around +200k. Unless it’s an absolute disaster the Fed will be raising rates next week. Their meeting starts Wednesday night our time and runs for two days. We have Chinese Industrial, Retail and fixed asset investment numbers out Tuesday and our jobs figures out Thursday. Only CSL, COH, TRS, NWS and SGM go ex-div next week so there will be less weighing on our market.

Time for me to log off for another week. As I’m typing this the market is shutting down after a fairly positive day. Weekend is a bit sparse for me. Adelaide Cup is on Monday and it’s a public holiday here in SA. I’ll still be on the screens though, no rest for the wicked. They don’t nickname us ‘Screen Jockeys’ for nothing. Also, if it’s your thing, Adele has her concert here on Monday night. My wife is going and so are 65,000 other people. Should be an enjoyable night for all. Regardless of what you are doing this weekend, enjoy yourself and stay safe. I’ll speak to you all next week. Go Crows!

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.