ASX Weekly Wrap 03/07 - 07/07

After a strong start to the week, with Tuesday providing our best single day in 8 months (+1.75%), the XJO trailed off to finish the week down 17.90 points or 0.31%. Our high was 5,790.40 on Wednesday and the low was 5,676.00 on Friday.

To kick off the week we had the Caixin Chinese manufacturing PMI read. Remember this read is from an independent financial firm separate from the NBS of China. Like the NBS stat the week before the Caixin manufacturing PMI read did increase above expectations to a figure of 50.4. This was up from the previous month’s figure of 49.6 and the forecast figure of 49.5. Once again it shows expansion in the manufacturing sector in China for June and could indicate May’s contraction was a once off figure. This plays into the reflation/commodity trade that again seems to be gaining momentum.

In fact there was a host of manufacturing PMI data released last week around the globe with most showing very healthy numbers. The Eurozone came in at 57.4 up from 57.3 the previous month. The US came in at 57.8 up from 54.9. Germany 59.6 up from 59.3 and even Japan a read of 52.4 up from a read of 52.0. I feel at this point in time these stats are probably the most important to global growth and inflation. It proves that growth is on the way up and demand is rising. This should help commodity prices rise and hence help PPI/CPI rise as well. Overall these are very encouraging results for the world economy.

Locally we had some important data to digest. First up were the ANZ job ads which were up 2.7%. This is an increase on the previous month’s read of +0.4%. This is excellent news for our economy and jobs figures moving forward. It shows that firms are confident and looking to hire more staff which means our actual jobs figures should be well supported again this month.

The next set of data release was retail sales. Again we got a stronger than expected read here. The data showed a +0.6% increase in retail spending for May. This was well above the +0.2% forecast but below the previous month’s exceptional read of +1.0%. In the last two months we have seen a big turnaround in retail spending after seeing retail spending falling to flat at the beginning of the year. In fact our year on year retail spending is +3.3%, which is the highest read we have had since October 2016. It’s encouraging that people are opening their wallets again and confident enough to spend. It’s no coincidence though as jobs figures and consumer confidence are also on the rise. These have a strong correlation to retail spending as when people are working and confident in their financial situation they will spend.

The final set of data to be released was our trade balance for May and boy did that blow the market away. The figure came in at a surplus of $2.47bill well above the $1.1bill forecast. Our imports increased by 1% but our exports also rose 9%. This large increase was attributed to ports getting back online to full capacity in QLD after cyclone Debbie. We also saw larger than usual export volumes of LNG contribute as production ramped up at a couple of new major projects. Despite what some in the media want you to think recent figures over the last three months show the Australian economy is in a very healthy position and should only get stronger as the year progresses and global strength flows through.

In the first, fairly brief, bit of company news this week we saw the takeover bid for Fairfax Media (FXJ) pulled by private equity group TPG last weekend. Basically it seemed very opportunistic and looked like a grab for FXJ’s only prized asset in Domain. FXJ dismissed the takeover bids and ceased negotiations with TPG and has said it will continue with plans to spin out the Domain, who are making real inroads on REA group, in the property listing game. Some analysts value Domain at $2.7bill alone, so you can see the $2.8bill bid that was made was really a bit cheeky. As a result FXJ shares tumbled back to the mid-90s last Monday after peaking at $1.25+ the month before. FXJ is not a stock I am considering at the moment as it contains a lot of old media and the only thing worthwhile is Domain and they will be spinning that out. I will look at Domain when they eventually do list, but I dare say valuations won’t be cheap.

It was a terrible week for Coca-Cola Amatil (CCL) with two separate pieces of negative news to hit the stock. The first being that Woolworths had decided to not to stock the new ‘No Sugar’ range of Coke in its stores at this point in time. WOW reasoning for not stocking the new line is customers are already saturated with choice for sugar free drinks. You can’t deny that. You only need to look down their soft drink aisle to see this. The second bit of bad news came from Dominos and the fact that they will not renew their contract with CCL and will in fact be switching to Pepsi. There has been no reason given, that I could find, from CCL or DMP but I dare say this would come down to cost. I have no doubt that Pepsi offered their drinks at a much lower unit cost compared to CCL. This means DMP can get a larger margin on drink sales as they will more than likely charge the same as they do now for coke products.

The final piece of company news comes from Flight Centre (FLT). They confirmed earnings guidance this week would be in the upper end of previous estimates of $300-$330mill. They confirmed profits before tax would come in at $325-$330mill. This was a result of record sales numbers and a significantly stronger second half of the financial year. It must be noted that they did downgrade guidance to that $300-$330mill figure after a tough first half. The original estimates sat at $320-$350mill, which now looks like they will meet regardless. I have always really liked the FLT business and particularly management. I have owned FLT in the past but sold a couple of years ago after it tipped over $50 a share. Since then it did fall to $28 before eventually rebounding. I did miss the breakout entry at $32 recently due to my fears over their bricks and mortar business model, but management are key here and seem to prove all the doubters wrong. Having said that at a recent price of $44 they do look expensive here and I would wait for a pull back for entry.

Most sectors ended in the red last week barring resource, IT and telecommunications. This continues with the theme of the risk on nature of the market at the moment. The health care sector was sold off after a major broking house downgraded Sonic Healthcare’s price target. Energy continued its slump as oil was sold off again after its recent rally. Profits were taken in the industrial sector as they continue to look pricey on current multiples. Finally gold had a terrible week as the base metal continued to be sold off on the back of real rates rising.

In the commodities space it was a quiet week. As I mentioned above gold continues to be sold off as bond yields continue to rise globally. The US 10yr sits at a yield of 2.40% now and the 2yr yields are at multi year highs. Oil continues to sell off as supply increases. Copper fell to roughly 2.65lb to test old resistance and thus far has held it very well. The copper chart remains very bullish in my opinion. Iron Ore lost some of its previous week’s gains but also found support and managed to bounce. Zinc continues to trade near decade highs as supply levels dwindle and demand continues to increase.

Technically the XJO continues to trade above the 200 day moving average and is forming a nice triangle. It should tighten into the end of that triangle and break either up or down. I am suggesting it will break upwards as economic data continues to get better and we have had very few earnings downgrades coming into reporting season in August/September. Generally this time of year we have a decent run up into reporting as good news is factored in, then was trade sideways into November before finishing the year strong. Upside target for the year remains 6,000 and my downside target is 5,650.

Another quiet week for economic data before we get Australian jobs and CPI in a couple of weeks. Chinese CPI/PPI plus their trade balance is released this week. Euro and US CPI/PPI is also released. We have the g20 meeting wrapping up as well with hopefully some progress made on North Korea concerns. Outside of this its bone dry. I hope you all enjoyed the special section I did on lithium last week. I had a great response from my clients and on social media. I enjoyed writing about it and gaining a more in-depth knowledge of the sector. I hope it was of some use to you and I’ll continue to do special pieces, like this, when I see an opportunity for us in the markets.

Have a busy start to the week personally. It’s my wife’s birthday tomorrow hence I spent the weekend shopping and preparing for this. Our little man has caught himself a cold and I fear it’s only a matter of time before it is passed on to me. I don’t help myself when I sit in artic conditions at the football of a Friday night. Crows got a big win in the end but I had to defrost myself when I got home. Hope you all have a wonderful week. I will 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.