ASX Weekly Wrap 10/04 - 13/04

In a shorter trading week it seemed like we would end up over 1% based off trading action on Monday to Wednesday. Trading on Thursday wiped out most gains as markets became wobbly due to geopolitical fears. In the end the XJO ended up 27.4 points or +0.47%. Our high was 5,950.10 on Tuesday and our low was 5,838.30 on Monday.

The last couple of weeks have been dominated by geopolitical issues. It started when a group in Syria released chemical weapons on citizens early last week. The US reacted swiftly by firing 59 missiles at an air base that they identified is where the chemical attack originated from. From there is has been a slinging match between the US, Russia, China and now North Korea all puffing their chests out to assert their authority. When the missiles were launched we saw the XJO drop some 50 points only to finish well above its lows for the day. The instant reaction was of fear but it subsided soon after. The concerns now is what is next. Apparently China sent 150,000 troops to the North Korea border as a show of its strength. Trump has said that North Korea’s nuclear program must stop. In all likely hood nothing will come of this from a military stand point. I can see the US & China working together to try and convince North Korea to end its nuclear program in a diplomatic manner. Just wanted to also point out why Syria may be so important to Russia and the USA. The below pictures shows the major oil pipelines that feed Europe.

Regardless of what is to come the markets have switched to a ‘risk off’ investment theme. By this I mean the market has switched into safer assets, namely bonds. The US 10yr yield has fallen from 2.50% to 2.24% in a matter of a couple of weeks. Even our local 3yr bond has fallen from 2.13% to 1.77%. Remember yields and bond prices are inversely correlated. Hence if bonds are being bought up and bond prices are going up, as they are in this case, yields will come down. Bonds are seen as probably the safest asset class behind cash. Some would say Government Bonds are safer than cash as most cash is kept in banks. If the banks were to go under then there is a chance your cash is lost. It’s highly unlikely that a developed nation such as the US or Australia would default itself so theoretically government bonds are safer.

The XJO has somewhat decoupled from world markets in the last few weeks. Since the 23rd March we are up 3.1% compared to the Dow Jones which is -0.27% in this time. This could be due to us underperforming in previous months when compared to the Dow Jones or more than likely dividend money flowing through which is being reinvested into the market. April is traditionally a bullish month for us as it also leads into bank reporting season. Extra money comes into the market looking for those healthy yields from the banks.

Australian jobs numbers for March were released today and defied all expectations. We ended up adding 60,900 jobs for March, well ahead of the 20,000 expected. February’s slide of 6,400 was also revised higher to a lift of 2,800. This makes it the sixth increase in jobs in a row. We now have 12.06million people in work, which is also a national record. In the last twelve months we have added 146,000 jobs at a rate of 1.22% pa. This is also the fastest rate since September last year.

Despite the strong numbers the unemployment rate stayed steady at 5.9% due to the participation rate lifting from 64.6% to 64.8%. Whilst monthly jobs numbers are volatile and hard to read on the overall trend is encouraging. It shows what we have known for a while that the Australian economy is in a solid position and there are some signs of growing momentum. What needs to happen now is obviously a continued increase in jobs and a lowering of that unemployment rate. This will then put pressure on wage inflation as we approach full employment and then this will flow through to core inflation.

The Chinese trade balance was also released today and it came in well above forecasts. China had a surplus of $US23.93bill for March, well ahead of the $US12bill forecasts. Exports rose 16.4% and imports increased 20.3%. Obviously these are very bullish figures and show that the world and Chinese economy are travelling along at a healthy rate. Any fears of a slowdown after their unusual February figures have now been eased.

Fortescue (FMG) released their third quarter production figures today and again they were impressive. For the quarter they were able to ship 39.6mt of Iron Ore at an average sale price of $US65t. It cost them $US13.06wmt to do this. This cost figure was slightly higher due to weather disruptions during the period but they still expect costs to come in at $12-$13wmt for 16/17. They also said that they are still on track to meet forecast production of 165-170mt of iron ore for the financial year.

Other points of interest include the repayment of $US1bill of debt during the quarter. Gross debt now sits at $US4.3bill or 31% gross gearing. If you include the $UU1.5bill of cash they now have net gearing of just 22%. They also mentioned their strip ratio which sits at 1.1. Basically this ratio is how much waste material they must mine in order to get 1 ton of iron ore. The ratio they have is very good indeed. It means that for every two tons of material they mine they are getting 1 ton of iron ore from that. It’s basically as good as it gets when it comes to mining. You don’t see many strip ratios better than that.

Overall the stock was hammered today and has been for the last two weeks. This isn’t due to their quarterly production figures but mainly due to the Iron Ore price, which I will talk about later. FMG has a 92% correlation to the Iron Ore price so if the metal is off 2%, FMG will come off almost 2%. I am still very bullish FMG, BHP & RIO. I have said for a while it was likely Iron ore was to come down and even trade in that $60-$70 range, which it now has done. However the prospects for Iron Ore, in my opinion, remain very bullish and I would expect the commodity to bottom out around here before moving higher again in the second half of the year. FMG continue to pay down debt and still have massive operating cash flows even if Iron ore falls to $55t. Like I have previously stated what are they to do with their mass amounts of cash? I still believe some sort of capital management is around the corner plus we could see them diversify into another mineral. I would love to see them buy into a Copper miner. Maybe look at taking over OZ Minerals ($2.5bill market cap) or Sandfire ($1bill) for example? Most of it could be done with existing cash and rest via debt/equity raise. This would certainly help the stock price as earnings would not be as reliant on the one mineral.

TPG Telecom (TPG) made headlines this week when it announced it was going to build its own phone network that would reach 80% of the Australian population. It plans to use its existing fibre network as the skeleton of the service and then obviously to build phone towers around the nation. TPM also announced a $400mill entitlement offer on a 1 for 11.13 basis at a fixed price of $5.25. They will be using to funds to help build this network and also working capital. The stock has been in a trading halt since the announcement, hence the share price has yet to react.

This bold move by TPM sent shock waves through the Australian listed Telecommunications sector with Telstra’s share price falling 10% since the announcement and Vocus Communication’s price falling 20%. Obviously this increasing competition in the mobile space for all operators and will eventually squeeze margins and reduce market share for others. Most brokers have downgraded price targets on TPM as a result of the news and the average target now sits at $7.36 per share.

It was a big week for commodities and for Iron Ore most of all. Since its peak of $95t in February iron ore has fallen to $67t as of last night. This is mainly due to a couple of factors one being steel demand/prices have softened in China and the other being the geopolitical risks we are dealing with at the moment. A lot of the media pays particular attention to the iron ore spot price but in reality it accounts for less than 10% of physical trade of the metal. I would expect it to level off in this $60-$70 range and trade within that for a little while. April is also iron ore’s worst performing month of the calendar year so it’s not surprising these falls have occurred now.

Fundamentally things still remain very bullish for iron ore and other commodities. From the trade balance figures we saw today in China we saw in March they imported 430,000t of Copper, up from 340,000t, 95.56mt of Iron Ore, up from 83.49mt and 38.95mb of oil, up from 31.78mb. For oil it was a record import figure for a single month. Iron Ore imports were also +11.4% on March 2016. This shows us the demand is well and truly still there and that we are on track for another record year of iron ore imports from China.

To add to this positive sentiment surrounding commodities we need to look no further than global manufacturing PMIs. As you can see from the chart above the USA, Eurozone and China all have manufacturing sectors that are growing faster and recording PMI’s above the important 50 level. The chart below shows the relationship between the PMI, manufacturing and industrial production figures on a global scale. As you can see the PMI is usually a lead indicator as its figures are released well in advance of others, but the other two figures also track it very closely. This suggests that our global manufacturing sector is expanding at a rapid rate and that due to this there will be more demand for raw materials. This only puts upward pressure on commodity prices.

Gold is on the march again as some revert to it as a safety asset. God knows why when it yields nothing. As you can see it is approaching the red long term down ward trend line again which it last tested in November. It needs to break this and hold above it for Gold to make any further significant push higher. If not it will again test the blue long term up trend line below around the $1,150 mark. As you all know I am bearish Gold in the current climate and again feel it will reject the next test and fall again.

With a shorter trading week this week, and next for most markets due to the Easter holidays, there is little being released over the next week or so. Importantly China release their Q1 GDP on Monday whilst we are all enjoying our chocolate eggs, hence our market won’t have a chance to react until Tuesday. Wouldn’t be surprised to see the figure beat to the upside on Monday. Along with it comes retails sales, fixed asset investment and industrial production figures. At least with no trading it will allow everyone to absorb it properly. Finally on Thursday RIO will have its quarterly production report out to markets.

Well that’s enough from me. Really looking forward to this Easter break. Catching up with family and friends and tucking into some chocolate eggs and hot X buns is what it’s all about. Also have a heap of footy to watch which pleases me greatly. I hope you all enjoy your break. Please be careful on those roads. It is a busier time and we can all use a little more patience. Until next time, have a wonderful weekend and stay safe. 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.