ASX Weekly Wrap 17/07 - 21/07

The indecision within the markets continued last week with the XJO wiping off almost all of the previous week’s gains. The XJO finished down 42.30 points or 0.73% as it digested a lot of economic and company data. Our high for the week was 5,773.70 on Monday and our low was 5,678.70 on Tuesday.

As I signaled in the last ‘wrap’ last week was going to prove a busy one for economic and company data and it didn’t let us down. The most significant drop of data came from China in the form of its Q2 GDP plus monthly retail sales, industrial production and fixed asset investment numbers. As expected it continued the theme of Chinese data beating expectations. GDP figures came in +6.9% yoy versus a forecast +6.8% rate. This again showing the strength and resilience of the Chinese economy. Retail sales came in at +11% vs +10.6% expected, industrial production was +7.6%, well above the +6.5% expected and the fastest growth since December 2014. Finally fixed asset investment came in at +8.6% vs +8.5% expected. This comes in after a string of positive data from China over the last three months that has consistently beaten to the upside. It matches my theme of a strong second half of 2017 for the Australian economy that I have been pushing for some time now.

The second lot of major data came from local sources with our jobs numbers for June. The headline number saw us add +14,000 jobs for June, slightly below the +15,000 expected. The headline rate remained at 5.6% unemployment. Looking closer at the numbers we saw a very encouraging 62,000 fulltime positions added whilst we had 48,000 part time positions lost. It shows great confidence in the jobs market as employers are confident enough to move existing part time workers into full time positions. I would expect us to see continued strength with Australian jobs ad vacancies remain high, which means employers are still looking to add more staff. We also have corporate profits running higher, which means companies have more money to spend which means they will invest in more employees. Overall another very positive read.

The final two parts of economic news don’t in the shape of data but rather the RBA minutes and a new ruling handed down by APRA regarding the banks. Firstly the RBA stated much of the same in their minutes on Tuesday, regarding where rates and the economy were at, but there was one paragraph that got everyone in a bit of a frenzy and sent the Australian dollar to new recent highs. The RBA changed its neutral point on rates from 5% to 3.5%. This means where they see the sweet spot for rates. Everyone took that as a hawkish note and rates were set to move higher sooner, but those thoughts were soon dismissed by an RBA member on Thursday. Regardless it saw the AUD fly from 77c against the USD to touch just below 80c on Thursday.

APRA finally handed down its new capital requirements for the banks last week and it probably went straight down the middle of where forecasts had it. APRA now expects the banks to carry a Tier 1 Capital ratio of 10.5%. This is up from the 9.5% they ruled on a couple of years ago. It has to be implemented by 2020. This saw a lot of the banks jump 4-6% over a couple of days after they were sold off in anticipation of the announcement. The bounce came because most of the banks have a Tier 1 ratio of over 10% already and it is believed they will be make up the rest via organic growth in earnings and small asset sales. This means they won’t have to go to the market for equity. Financials are 20-30% off recent highs still so still make for a decent long term entry at current prices. By mid-next year rates will start to rise here so this will help with earnings. The APRA decision also takes some uncertainty out of the sector.

There were a host of quarterly production number reports during last week. I won’t go in any real depth on any of them but will talk in general about them. First up was Rio Tinto (RIO). Their numbers were weaker than last year but this was to be expected due to weather and rail maintenance interruptions. They downgraded full year iron ore production by 10mt, this lead to some broker earnings and price target downgrades, but most still have it on a buy/accumulate. This was the crux of the report from RIO.

BHP Billiton (BHP) was next of the big miners to report their production numbers for the June quarter. BHP, like RIO, had no surprises and probably ended with a slightly better report. Iron ore and oil came in slightly better than forecast but coal and copper were down mainly due to weather and strikes in Chile. They upgraded their iron ore guidance for 17/18 but also downgraded oil. This is slightly beneficial to earnings, in terms of oil, as it is loss making. Most analysts have kept forecasts at current levels or slightly increased them on the back of this report. As I have stated many times I am bullish RIO & BHP at current prices and feel they have a lot of upside in the next twelve months. Both stocks are off their recent highs, mainly due to the higher AUD, so offer up another entry opportunity.

A few of the oilers in Oilsearch (OSH), Woodside (WPL) & Santos (STO) also updated the market with their productions numbers for the June quarter. OSH came within forecasts but with a slightly better than expected price per barrel received. Their full year guidance remained unchanged. WPL missed with their LNG production and prices which caused overall earnings to slip. Their LNG/Pluto project remains a concern if lower LNG prices continue. Most broker feel there is limited upside with WPL. STO surprised the market with the cost of production per barrel lower than expected and debt being paid down at a faster rate as well. STO jumped almost 10% on the back of the numbers but still remains well off recent year highs. I am bearish oil in the longer term and none of the above stock interest me at current prices. If oil was to move higher there would be a trading opportunity there with OSH.

The purest lithium play on the ASX, Orocobre (ORE), released their quarterly figures during the week as well. Production was about 9% lower for the quarter due to weather conditions and the ability to get a key ingredient, in soda ash, trucked in to help with production. This was expected and they actually probably beat guidance here. The main problems come from their evaporation ponds and the lower than expected rates they are getting there. They had no solution to the problem in the quarterly which I think the market was expecting, hence the stock is off about 10% since then. Their productions costs were also slightly higher than expected. On the flip side the sale price for lithium carbonate equivalent (LCE) was higher than expected.

I spoke about ORE some weeks back when I went through the lithium industry in detail and mentioned my bullishness for the sector and ORE at the time. Nothing has changed here. I am still very bullish lithium and ORE moving forward. The evaporation pond issue is short term and they are due to double their LCE production over the next 12 months. As I have stated before brine production of lithium is technically harder than hard rock production. Once you get it right, it should all run smoothly. I feel this just presents another entry point for ORE in what I believe to be a 2-3 year play. As the supply of lithium continues to get tighter, players like ORE will benefit a great deal as they can realise those higher prices now. Most brokers left their earnings and price targets unchanged after the report and the average price target sits around $4.40. They last traded $3.20. I will also note ORE remains the heaviest shorted stock on the ASX at just a tad below 20% of total script. This means any positive sentiment towards ORE, or the lithium sector, will be met with a very severe and quick bounce as short positions are covered. You also generally find that around 20% short is close to the maximum limit on a stock. This is due to the fact there is only a certain amount of ORE stock out there to be used as collateral to short. It seems on most stocks to be around that 20%. This means we could see some relief for the stock in the short term.

As expected most sectors ended in the red last week. The worst performer was telecommunications again as the Telstra sell off continued. Its more and more likely that dividends will have to be cut moving forward and more re-invested back into the telco to get earnings rising again. Health care, Gold, property trusts and resources all were sold off due to the rising AUD. Health care especially doesn’t like a stronger AUD as about half of the sector’s earnings come from overseas. The banks were basically the only sector to stay in the green due to the APRA decision.

Commodities really did nothing of note this week and any spot price gains were offset by a higher AUD and hence the sell off on the XJO. I will turn to the technical view on the XJO now since I have not done it in a couple of weeks. The XJO continues to respect the 200dma and trades within a wedge formation with higher lows. I expect us to break out upwards out of the wedge as we come into earnings. Currently we are in the midst of confession season and have had little to no earnings downgrades. This means we should be in for a healthy reporting season coming up. We may get one more flush to the downside to test the 200dma again before the next up move occurs. Expect it to bounce quickly off that low.

Not much data to watch out for this week on the economic side of things, but what is being released is import. Australian CPI/PPI numbers are released later in the week and will be closely watched for a recovery in inflation. US second quarter GDP figures are due out on Friday night and are expected to recover strongly from the soft first quarter. A host of production data is due out this week on the local market. NCM, WSA, OZL, IGO, FMG, BPT, SFR & WBC are among those reporting those production numbers. GUD and OGC kick off earnings on Thursday with their full year results.

Very quiet weekend for me just gone. Spent most of it at home, but did head to the footy on Friday night which was enjoyable. Very entertaining match and the crowd was right into it as well. 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.