ASX Weekly Wrap 22/05 - 26/05

The XJO made modest gains this week as it was unable to establish strong momentum either way. The XJO ended up 24.30 points for the week or 0.42%. The high was 5,795.70 on Tuesday and the low was 5,738.60 on Friday. The XJO has followed a familiar pattern for the last few weeks as it finds support and buying early in the week only to be sold off on the Thursday and Friday.

Another quiet week with little comment on in terms of company and economic news. One of the positive releases of data this week came from the Eurozone and their manufacturing PMI. The reading came in at a very strong 57.0 for May, above last month’s 56.7 and the expected 56.5. This is the highest reading for the manufacturing PMI since April 2011. More importantly exports rose to 6 year highs and the backlog of work registered its second highest reading since 2011. This suggests the momentum should continue into the June figures. Once again this continues with a global recovery in manufacturing which is very important to global growth and the reflation story. If you remember we had the Eurozone, USA and China all sitting in the 50+ reading for the first time in some time at the start of the year. Since then China has softened but still is expanding and reading above 50. The trend suggests continued improvement in manufacturing is to come on a global scale, including Australia. This will continue to put upward pressure on commodity prices.

On a sour note one of the major rating agencies, in Moody's, downgraded its rating for China this week from Aa3 to A1 with a steady outlook. This follows a stance it took 15 months ago where it placed the rating on a negative outlook. The downgrade was based upon the increasing debt that is accumulating within the Chinese economy. Moody’s has been the only rating agency to downgrade at this stage but usually when one of the majors does it the others follow (S&P and Fitch). Whilst this is negative news and will probably force cash rates up 40-50bps over the short terms I take these ratings with a pinch of salt. You have to remember these rating agencies are the same groups that gave subprime mortgage bonds an investment grade rating before changing that to Junk status and causing the start of the GFC. In my eyes they lost a lot of creditability after the events of the GFC.

Continuing with the negative theme Australian construction numbers for Q1 2017 came in at a lower than expected figure. Work performed for the quarter fell 0.7% to $46.417bill. This does not bode well for the Q1 GDP figures due out next week as coupled with poor retail sales figures we could see another negative quarter of GDP figures. Most analysts still sit in the +0.2%-+0.4% range for Q1 GDP as there are some more figures to be released over the next week or so that could help the situation. The risk though does appear to be to the downside.

The above chart shows the value of construction work being done over the last few decades. As we are all aware the mining boom created a huge influx of construction work that peaked around 2012/13 and has since fallen away. What has been driving us since then has been residential and non-residential construction work. It now seems as if residential construction has peaked. It needs to be noted whilst residential construction has fallen away it is expected to stay very healthy. This is positive because if this falls away too much then it will put further upward pressure on house prices if supply were to drop away too much. We also now know why the 2017 budget was infrastructure heavy as the government looks to fill that gap left by the mining boom and residential construction. Whilst a soft GDP print would not be favorable for the Australian economy I still believe our second half of 2017 will be very strong on the back of strong global economic growth. It’s also thought that cyclones experienced in QLD in the first quarter put a dampener on construction and retail figures.

As expected OPEC met during the week in Vienna and extended oil production cuts put in place at the last meeting. The cuts were extended for a further 9 months which means they will last until March 2018. The market was hoping for much deeper cuts as the Oil prices rallied over the last two weeks to sit around $51 before the meeting. Upon of hearing the news it was sold down to $48.50 before recovering to almost $50 a barrel again. OPEC expects the extension of cuts will remove the glut of oil in the market over the next 9 months and deeper cuts are not needed. The oil price still faces massive headwinds from the US as the oil-rig count increased for the 19th straight week. This means that oil production will continue to increase in the US. As I spoke about late last year this is further evidence that the balance of power in the energy markets are shifting from OPEC to the US.

As the chart above depicts oil remains in a downward trend since peaking at $55 earlier in the year. It will have to break this downtrend if it wishes to seek higher prices, but until then it will continue to put in lower highs. Fundamentals suggest we could see $40 oil again by the end of the year if supply doesn’t ease or there isn’t a large increase in demand.

The crypto currency Bitcoin (BTC) has been the talk of the market for the last couple of weeks and you can see why from the chart above. Back in late march it was trading a little over $US900 per BTC only to have rallied to a touch under $2,800 late this week. It’s been an emphatic rise for the digital currency that traded a fraction of a cent when it first was released by Satoshi Nakamoto in 2008. Just last year an Australian programmer by the name of Peter Wright claimed to be Nakamoto and the creator of Bitcoin. However this is not 100% definitive as strong evidence has not been provided by Mr. Wright to prove this.

Basically BTC is a digital currency devoid of regulation, government and central banks. It can be used just like any other currency to buy goods and services online by those who will accept it. It trades on the back of ‘block chain’ technology, which funnily enough is being investigated by the ASX to possibly implement within our own markets, but that is another story. It is found by highly powerful PCs mining complex algorithms. That’s as basic as I can put it as I am not 100% sure myself how a BTC is mined. Its creator did put a cap on how many could be mined in total at a theoretical limit of 21mill. It is thought by 2024 94% of all BTC will be discovered. Having such limited supply does put a massive strain on the demand/supply side of the equation and hence its rise. The creator of Snapchat has predicted it may get as high as $500,000 per BTC by 2030.

Due to its volatile nature it has been a traders paradise of late and hence it being on the lips of financial markets. It can be bought and sold on eligible platforms just like a normal shares. Before you ask no I don’t trade it personally or for clients. Firstly I am not authorized to do so and secondly it would be a compliance nightmare due to its volatile nature. It is thought many who usually head to Gold for safety have now switched to BTC as it’s not linked to any other financial asset or country.

How would you feel now being the people who first used the currency to make a purchase online? A gentleman used 10,000 BTC to buy two pizzas online in 2010. Those 10,000 BTC are now worth roughly $US23mill. Would make you sick to your stomach now no matter how good the pizzas were.

It’s hard to predict what BTC will do. It could crash or it could keep on going for some time yet. Whatever happens it’s a fascinating story, one they will make a movie about one day. Probably the best thing that will come from it is the block chain technology that will have huge implications as to the way we transact with each other in the future.

Gold made headlines again this week as now Trump’s son in law is being investigated for his links to the Russians. People then worry if this will find its way back to Trump. Then there are concerns surrounding Trump’s ability to get his Tax and Infrastructure plans off the ground hence the rise in the precious metal back to the 1265oz mark. It looks as if it will test that downward trend line again this week. If it can break this and hold it, it will be extremely bullish for Gold, however a sell off before the Fed meeting in June, where it’s thought another rate rise is in store, is possible. I will not trade Gold until it breaks either way. At this point fundamentals still suggest a lower gold price. The fact is though the longer it tightens and trades in that wedge pattern above (between red & blue lines) then the more explosive the move will be. If it does break up out of this pattern then my favourite gold plays are EVN, SBM and NST in the mid-cap space and OKU & KIN in the speculative end of town. Sitting on my hands for now as the risk is too great either way.

Iron ore had another disappointing week as stockpiles surged to record levels and Moody’s downgrade of China weighed on the metal. Really it’s nothing new to see here and $55 looks like the next line of support for Iron Ore. The second half of the year is traditionally bullish for the commodity. Copper has benefited from a lower USD bouncing off its lows of 2.47 a couple of weeks ago to now trade at 2.56 per pound. Overall a lower USD will help commodities as it does make them cheaper for those buying outside the US. This will hopefully underpin some support for metals and a move back into the space on the ASX.

As I wrote about last week the XJO did test the underbelly of that recent uptrend again before being sold off. Probability says we move down towards that 200 day moving average and the 5600 level. However if we can reclaim that uptrend it would be very bullish as it would show great strength in the index in what are usually bearish months of May/June.

I thought I would finish off this week’s wrap by having a look at the best performing sectors for the week and year. This will be something I will update every week from now on in and will help us understand what sectors are moving the markets. One thing that is very evident from the above table is that there has definitely been a move of ‘Risk Off’ for the XJO in 2017. The best performing sectors are Health Care (+16%), Utilities (+15%) and Industrials (+11%). The first two sectors are considered very defensive and often seen as safe havens for the market. This year we have seen new highs on the likes of CSL, SHL, RMD, COH and ANN within Health Care and AGL & SKI within the Utilities. Industrials have benefited from the increase in housing construction over the last 18 months hence their outperformance. The worst performing sectors have been Telecommunications (-12%), Emerging Companies (-8%) and Financials (-2%). Now emerging companies can largely be ignored due to the insignificant size, but it’s no surprise the Telecommunications and Financials (banks) have been under pressure. These include names such as TLS, VOC, TPM and of course the big banks such as ANZ, WBC, NAB, CBA and MQG. Now the Financials make up more than 30% of our index hence how they can have such a large influence on the direction of the market.

A busy week ahead for economic data as some of it will feed into our GDP figures next week. The US and Chinese markets are closed today and tonight for various holidays. China is also closed tomorrow so it might be a bit quitter on the Iron ore front. Tomorrow we have Australian building approvals and later in the week we have private credit and capex numbers, retails sales, house prices and our manufacturing PMI. All of these will feed into our GDP figures next week. Overseas we have Japanese retail sales, unemployment, industrial production and manufacturing PMI. Finally on Friday night we have the US jobs figures. An important week for economic data to say the least.

I hope you have all enjoyed another weekly wrap. It’s working better for me being able to deliver these on a Monday as I do get to knock some of it off on the weekend, plus cover any important events that occur during that time as well. How do you like it? Do you prefer it return to the Friday or are you happy with the Monday? Shoot me an email with your thoughts. Hope you all have a wonderful week and I’ll speak to you soon. 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.