ASX Weekly Wrap 24/07 - 28/07

It was a roller-coaster week again as any and all gains made at the start of the week were soon wiped away by the end of it. Amazon sent a scare through markets after reporting a poorer than expect profit after the US had closed on Friday morning. This sent the DOW futures down 1% and also saw our market peel off by 90 points. It was all about nothing in the end as US markets ended up flat on Friday night regardless. The XJO lost 20 points for the week or 0.34%. Our high was 5,799.60 on Thursday and our low was 5,653.30 on Monday.

The week would be dominated by two sets of economic figures for us, our CPI and the US Q2 GDP numbers. Overall the figures were softer than expected with quarter on quarter (qoq) rising just +0.2% after a +0.4% forecast and +0.5% read last month. The trimmed mean, a figure most analysts turn to, came in right on forecast at +0.5% qoq but the year on year figures saw just a read of +1.9% after 2.2% was expected. It shows what much of the globe is experiencing that inflation is struggling to gain traction which means rates here will be hold for the rest of the year at least. Inflation has been more sluggish than I expected this year as I even thought we were a chance at a rate rise later on. However if world manufacturing and overall growth continue to strengthen it will be only a matter of time before inflation picks up again. We may just have to wait until 2018 to see any real momentum in the figures.

The second lot of data that was of concern was released whilst most of you would have been asleep on Friday night. It was the second quarter GDP figures. QoQ growth was subdued and came in below forecasts at +1.0% vs +1.3% expected. The YoY figures were much better coming in at +2.6% and right on what was expected. This was much faster than last quarter’s read of +1.2% and showed the US is again picking up steam. Forecasts for the third quarter are now being revised up. It shows a solid US economy without it being too strong. Still positive for overall global growth since China and the Eurozone are starting to really move along.

Just quickly the Fed Reserve met during the week to discuss the US cash rate. As expected they left rates on hold at 1.25%. However in their commentary they did remain more on the hawkish side and left the door open for another rate rise this year. At the moment the market is pricing in a 50% of a rise in December. The week before hand the market took Yellen’s speech in a doveish tone, but the commentary surrounding last week’s meeting did temper that a bit. 10yr US treasuries are yielding 2.30% still, which off their recent highs of 2.40% but well off their lows of 2.14%.

Sandfire (SFR), Newcrest (NCM), OZ Minerals (OZL) and Fortescue (FMG) were the heavy hitters who released their quarterly production reports during the week. We will just cover OZL and FMG today as these are the only stocks that any of you own. Overall they were some impressive numbers and there were no nasty surprises. Copper production was +12% on Q1 and Gold was +23%. OZL reaffirmed its full year guidance of 105-110kt of copper and 115-125koz of gold. It also noted it had $625mill in cash with no debt. This is more than enough to get their next main project in Carrapateena up and going, with the decision to mine on that due at the end of this year.

Initially the market sold it off but after some digestion overnight and a better copper and gold price movements OZL moved up 10% the next day. I am bullish OZL and copper overall so am happy to hold here. We did get most of you back into OZL in the $7.20 - $7.50 range after taking profits at $10 some time ago. With metals acting the way they are I expect OZL to see $10 again soon.

Like OZL, FMG also had a very positive quarterly production report last week. Highlights were the 44mt (+20% qoq) of iron ore they produced and the fact they have shipped 170mt+ of the ore FY16/17, so well within guidance. Cash costs are still coming down producing ore at $US12.16wmt. The only negative is the price they get for their iron ore is at a discount as it is of lower quality compared to BHP and RIO.

As most of you know I am still very bullish FMG and iron ore in the short to medium term (2-5 years). China is far from done from improving their infrastructure and continue to stimulate the economy. I also like the fact FMG is sitting on $US1.8bill in cash and only $US4.5bill in gross debt. Their next lot of debt isn’t due until 2022 ($US2.16bill). This means one of two things. They have the ability to go buy a high quality asset or company to increase iron ore production or diversify into other commodities and/or increase cash returns to shareholders. I feel it will be a bit of both. For their last interim dividend they paid out to shareholders 20cps (100% franked). If they were to match that in their upcoming full year results it would mean a total of 40cps (100% Franked) would be paid out to shareholders. This gives them a fully franked yield of 6.9%. I feel they will pay more than the 20cps they paid in the interim report and also include some sort of capital management whether it be buy-backs or capital returns. Combine the above with the fact that FMG is trading on a mere PE of 6x current earnings it makes for a very attractive case. As I said I am bullish iron ore and the China story so if you don’t sit in that boat then FMG will obviously not be for you.

A mixed week with resources, gold and consumer staples sectors (ie WOW, WES) seeing some gains on the back of higher commodity prices and better sentiment towards retail. Health care, financials and industrials all finished in the red due to a higher Australian dollar and timid inflation reports. Utilities continue to under perform as investors move to a ‘risk on’ nature and enter into resources.

Commodities continued to surge last week with Gold, Oil, Iron Ore, Zinc and Tin all making decent gains. However it was Copper that got everyone’s chin wagging as Dr. Copper bust through resistance and surged to new recent highs. Strong data out of China forced copper up over 6% within 24 hours last week as supply continues to fall due to old mines getting to the end of their life with lower head grades and no real new supply coming online. Its now expected copper supply will enter into a deficit situation as soon as 2019. Copper is also a great indicator of world growth as its used so much manufacturing. Copper should be on its way to $3lb now, albeit it may need to catch it breath momentarily. Like most commodities I am very bullish copper hence my attraction to OZL.

Another busy week ahead with the start of earnings season upon us. The main players who are reporting this week are listed below. We also have Chinese manufacturing PMI, Australian manufacturing PMI, RBA meeting, building approvals and US unemployment on Friday night.

I hope you all had a lovely weekend. We spent the time catching up with friends and shopping. Was a bit wet and cold to do much else. Have a wonderful week everyone and stay safe. 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.