ASX Weekly Wrap 05/06 - 09/06

A gloomy week for the XJO as the market promptly lost all gains we had made the week before. We ended up down 110.30 points or 1.91% for the week. Our high was 5,748.60 on Monday and our low was 5,629.80 on Thursday.

Global markets were generally on the down side as uncertainty again reared its ugly head as the UK election headed towards a hung parliament. It is in a very similar situation as to our own Australian election in 2016 except that Turnbull was able to scrape through. According to polls Theresa May should have had a comfortable victory, however recent events in the UK, such as the terrorists attacks, raised questions about her ability to keep the UK safe. This hurt at the polls as the conservatives lost ground whilst their opposition gained. May ended up winning most of the vote, as expected, but not enough to form a majority government. Now she must turn to smaller parties to try and form that government or face another election later this year. This is exactly what markets hate, uncertainty. Most of Europe’s markets sold off on the back of this and it flowed through to the USA and locally.

Here in Australia we had mixed data flow through during the week. The biggest drop was the GDP figures for the first quarter in 2017. As expected it came in fairly soft rising +0.3% on quarter and +1.7% for the last 12 months. This is the slowest rate the economy has grown at since 2009 and worried the market. The XJO and AUD did bounce on the figures as lot were predicting negative growth for the quarter, but obviously this didn’t happen. Reason’s suggested for a softer number mainly centered on weather impacts from Cyclone Debbie early in the year. This stalled a lot of construction and retail spend. Both the RBA and government have held firm on their forecasts for around 3% of GDP growth for the year and one would have thought they would have been aware of a softer number the come from Q1.

To couple the soft GDP figures we also had a weak trade balance figure that came in at just a $555mill surplus for April. This was well below the $1.9bill expected and below the $3.1bill for March. Once again Cyclone Debbie was pinned with the blame impacting coal exports severely. Also metal prices being generally down across the board had a negative impact. The official figures showed exports fell 8% whilst imports also fell by 1%. The trade balance is expected to bounce back in the next release of figures.

A country that had a very strong trade balance released during the week was China. The figures came in well above forecast with exports growing 8.7% for May, faster than the 8% for April and faster than the 7% forecast. Imports rose by 14.8% again faster than the 11.9% for April and well above forecasts of 8.5%. The overall surplus came in at $US40.81bill, below the $US46bill expected, but mainly due to the much strong import numbers. Copper, Oil & Iron Ore imports all rose for the month to 390,000t, 37.2mill barrels and 91.52mill tonnes respectively. These are very encouraging figures as many had believed that China’s economy was entering into a weaker period again. Clearly these numbers show this is not the case and there is still a clear recover evident from the lulls of 2015 and the first half of 2016. Again this bodes well for the commodity prices and the Australian economy overall.

The final talking point for the week was centered on the RBA’s cash rate decision. As expected the RBA kept our official cash rate on hold at 1.50%. In their commentary they kept a neutral view on rates for the near future and di remark how slow wages have been growing. It was more of the same from the RBA which now you would have to say would remain the status quo for the remainder of 2017. I still believe our next rate move will be up but that is unlikely to happen until mid-2018 at the earliest now.

The biggest, and probably only company news of the week, came from Vocus Communications (VOC) who received a highly condition takeover offer from private equity firm KKR. Rumors have circulated for some time that private equity were sniffing around VOC, and finally they emerged from the shadows. The offer is a full cash offer at $3.50 ($2.18bill) per share which represents a 22% premium to the last closing price. As I mentioned it is highly conditional and VOC have to meet certain EBITDA and debt requirements between now and when the takeover is finalized. VOC has told shareholders to take no action as it formally reviewed the offer from KKR. VOC shares rose 33% after receiving the offer and finished the week at $3.71. This price is well off the lows it set early in May but well below the $9 highs we saw in 2016.

It is believed that this is a highly opportunistic offer and will be rejected by the board. VOC noted they had not received any other offers but had been speaking to other companies about the business. My thoughts are to hold on. This surely should put a floor under the share price now as it does show where value lies in the company. I also would expect another offer to come in from a third party or KKR to increase theirs. Until the board says they are accepting an offer from a company and it has their full support you should sit tight.

As you can see from the above table it was a pretty rough week for most sectors on the XJO. Energy, Property Trusts, Consumer Staples and Utilities copping the worst of it. In fact the only sectors to see green during the week were the Gold and Health Care, which also remain two of the best performing sectors of the year. The XJO also had basically all gains for the year wiped out last week with it only just keeping its head above water. Below are the biggest gainers and losers for the week.

As I mentioned last week Gold had the potential to break out above the long term trend line and it did. It promptly hit recent old high resistance and since has fallen back below that trend line. This has the potential now to serve as a false break. I had expected it to bounce off the trend and then push through resistance. This did not occur, but doesn’t mean it still won’t. Usually Gold performs poorly leading up to a Fed rate decision and then bounces once the rate rise is confirmed. This is not how it has played out thus far this time as we saw it climb on the back of the UK election. We have seen some recent weakness, but we will have to wait to see how it plays out after the Fed decision later in the week. If we see the traditional bounce it may break that downtrend again and push on.

One commodity that did breakout and has held it thus far is Copper. It broke on the stronger than expected Chinese trade balance and has continued to move on since. It is now in consolidation mode but it should pull back into that short term uptrend (blue line) in the next week or so. Copper is a great bellwether for global economic strength and it’s no surprise it has finally broken this down trend given how strong the global manufacturing sector is. There are a host of quality copper stocks listed on the XJO. In fact a new one listed last week in Alderan (AL8). It has performed really well and is currently 110% above its IPO price. It couldn’t have picked a better time to list really. Oz Minerals (OZL) is probably my favourite mid-cap copper stock with Sandfire (SFR) not far behind.

The XJO has continued to trade in that downward trend it formed six weeks ago. It is really close to testing that 200 day moving average and will probably do that this week. This is really important for the XJO moving forward because if we can’t hold that 200 day then we could be in for a significant pull back. The XJO has encouragingly been able to open fairly strong today with solid gains so hopefully this is a sign of the direction moving forward.

Another busy week ahead with more important economic data to come. The biggest obviously is the US Fed rate decision which will be revealed early Thursday morning our time. It is expected that the Fed will increase rates by 25bp again. We have UK CPI & PPI tonight and then Chinese retail sales, industrial production and fixed asset investment tomorrow. US CPI figures also feature tomorrow night. Locally we have May’s jobs figures out on Thursday with the rate expected to stay steady at 5.7%.

Remember we have the end of the financial year fast approaching so now is great time to review your portfolio and adjust it accordingly. Hope you all have a wonderful week and stay safe. I’ll speak to you all 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.