ASX Weekly Wrap 27/03 - 31/03

A very strong week by the XJO, which really came out of nowhere. We ended up 2.19% for the week with our high of 5,901.50 today and our low of 5,698.10 on Monday.

In a week that was a bit dry for company and economic news the market was very buoyant. The market was able to break through some very important technical levels and hold them. I had expected some weakness on doubts surrounding Trump’s ability to get policies through, but the second half of the week provided much welcomed bullishness. Monday proved to be a nothing day with little movement either way on the index. Tuesday provided some gains, but it wasn’t until Wednesday and Thursday we saw some decent moves. In fact a combined 126.8 points were added on those two days alone in what was very strong buying across the board. I’d expect the market to continue in its upward trajectory over the coming week with dividend money flowing back into the market and banks to report in May.

The main data drop this week came last night in the form of the US 4th Quarter GDP. It was overall a positive number coming in at +2.1% for the quarter and above the +1.9% forecasts. Consumer spending was higher than expected and what pushed the figure higher. For 2016 GDP only grew at +1.6%, but that was mainly due to the soft first half with +0.8% and +1.4% growth in the first two quarters respectively. The last two quarters grew at +3.5% and +2.1% so showed a much better take on the strong US economy. The market took last night’s numbers in its stride and sent the S&P500 (SPX) finished up 0.3% for the night.

The focus on the retail sector continued this week with Amazon confirming that it will officially hit Australian shores in 2018. It also stated it would bring its highly anticipated prime service along with the Amazon Fresh grocery delivery service. Coinciding with this announcement was the announcement made by Premier Investments (PMV) and Myer (MYR). If you recall last week we spoke of a 10.77% investment made by an unknown buyer into MYR. It was confirmed this week that Solomon Lew’s PMV was indeed the buyer. This caused MYR to trade as high as $1.295 up from the $1.05 level it was at before the investment was revealed. It is thought that most of the buying came from short sellers covering positions in case there is a takeover. I wouldn’t get my hopes up too much for a takeover of MYR by PMV. PMV announced the investment is purely strategic and it had not intentions of taking over MYR at this point in time. The stake it large enough for them to stop other potential suitors taking them over though.

China released their manufacturing and services PMI for March today and again it was very positive for the world’s second largest economy. The manufacturing PMI came in at 51.8 up from the 51.6 in February. This is the highest level it’s been at since April 2012. The services PMI dropped at 55.1 for March compared with 54.2 for February. Both sets of data tell us the Chinese economy is well on its way to recovery and is in fact expanding again from a manufacturing point of view but also in the services sector. This obviously is positive for the Australian economy moving forward.

The final major macro news this week was the UK parliament passing article 50 which paths the way for them to leave the EU. It was a non-event as expected as it had already been digested by the market. Now comes to tough task of actually starting the process of leaving the EU and the consequences that come with that. What those consequences are we really don’t know and may not know for years to come. This is an unprecedented event hence we have nothing to draw from to compare it to. European markets, excluding the FTSE, are trading at roughly a 39% discount to the US markets on an earnings ratio. One could argue that the worst is already factored in. Will be interesting to see how it plays out.

Bank of Queensland (BOQ) was the only company with noteworthy news to come out this week. It released its first half results this week which was received relatively well. Its profits fell 6% to $161mill for the half. Down from the $171mill it recorded a year before. Its net interest margin decreased 5bp to 1.85% for the half but their impairment expenses (i.e. bad loans) fell 25% to $27mill. BOQ decided to pay an interim dividend of 38cps fully franked. This is in line with its first half dividend last year.

Whilst current half numbers were disappointing the market took confidence in comments from BOQ CEO who said that mortgage applications were up 30% in recent weeks and he expected the company to return to profit growth in the second half of the year. The market has since pushed the shares from around $11.50 to $12.20 since the announcement. Whilst I’m bullish on the banks I will tend to stick to the big four. They have to size to compete and price the BOQs and BENs of the world out of the market. I can’t see any value in BOQ at current prices.

Oil had a great week and reclaimed some of the losses it made last week. It was able to creep back over the $50/b mark again on lower than expected inventory numbers in the US. Technically it was able to hold the trend line in blue and start heading towards old resistance. I still believe whilst more rigs and production is coming online in the US this will put downward pressure on Oil. This will force OPEC to cut production again to keep prices high. I will say we are heading into summer/spring in the US which traditionally is bullish for the oil price due to more driving done and domestic holidays taken.

Gold took a breather this week after moving strongly through to almost $1,260 an ounce. This was mainly due to the move back into equities as fears abated surrounding Trump’s presidency. Technically Gold is at risk of creating a double top around the 1,260 mark after failing to hold it a second time. It now sits at $1,242 an ounce and is looking like it could fall further. I really believed Gold would head towards $1,280 an ounce before coming off this time. This could still happen, but I am surprised how gold has not been able to get on with it. I remain bearish on gold as long as rates and US bond yields are on the way up.

Finally Iron Ore had another tough week where it fell from $91/t to finish around the $81/t mark. It seems to have found support around this level as stock piles in China sit a record levels but steel production remains strong. China imports have been very strong to start the year, as we know, so it will be interesting to see how it fairs in March.

As stated earlier technically the XJO passed some important tests this week. We officially are in a breakout now and have surpassed our recent high we set mid-February of 5,833. We should continue to move to 5,950 now before our next pull back and then eventual move to 6,000. We should get a boost from dividends flowing back into the market in the coming weeks plus a traditional run by our banks as they approach earnings reports in May. Overall I remain very bullish on the XJO from a technical and fundamental point of view. I still feel we will see 6,200 before the end of the year. The chart above is a very short term view of the market which shows that short term 5,950 target (green line). Below is a much longer term view of the market. This suggests that we could be on our way to 6,600 sometime in the first half of 2018 with an eventual re-test of our old highs later that year. Downside at this point seems to be only 5,400. Of course so much can change in the next 12-18 months but if we continue to trade in this current long term trend it’s a scenario I can see playing out.

I was looking back at our run from mid-2003 to 2007. The XJO went from an index level of 3,150 to our eventual high above 6,800 in 3.5 years. Since the GFC, and a similar level around the 3,150, it’s taken us almost 8 years to get where we are now and we still sit some 17% below our all-time highs. To me this suggests that this move is much more measured and sustainable bull run and one that could last for much longer. Unlike the pre-GFC Bull Run we have had a few 10-20% corrections along the way, which has shaken out the weaker money. The 2003-07 move had shallower 5-10% corrections and was a much more aggressive bull market. I’m not sure if it means anything really but I feel stepping back and looking at the bigger picture helps give a better perspective on things.

We are in for a much busier week to begin April as there is a raft of economic data to digest. The RBA meets to decide on rates, our trade balance is release, job ads, retail sales, manufacturing and services PMI and US unemployment on Friday night all to come as well. No company earnings reports are scheduled but I am sure there will be some exciting news to cover regardless. Haven’t got much planned myself this weekend. Obviously footy is on the agenda with the Crows playing the Hawks at the MCG tomorrow. We haven't beat the Hawks since 2011 so I dare say we are overdue a win. I went to the Crows game last Sunday and I can tell you is was very hot and humid. I wonder if that will have an effect on the players this week. Getting much cooler weather of late here in SA as the nights tend to get a bit chillier now. Might have to crack out the slippers soon. Hope you all have a wonderful weekend and stay safe. 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.