ASX Weekly Wrap 18/09 - 22/09

In what seems a regular occurrence of late, the XJO continued to grind down again this week. If it weren’t for a late rally on Friday the numbers could have been a lot worse. In the end we finished down 12.90 points or 0.23%. That means for the year we have gained a mere 29.20 points or 0.52%. This is a polar opposite to what we experienced at the start of year, which saw us knocking on the door of 6,000 with much optimism. It is also the opposite of what a lot major indices are experiencing across the globe with many hitting fresh all-time highs.

Very little economic data to speak of this week, but what was released turned out to be significant. To start with we had the Fed meet to decide on the US cash rate. As expected rates were left on hold at 1.25%, but it was commentary that followed that surprised the market. After a couple of dovish meetings of late and talking the US economy down Janet Yellen revealed a bullish and very hawkish outlook. First of all she all but confirmed there will be one more rate increase this year and then went on to follow that up suggesting there could be three more in 2018. Only a month ago there were doubts of another increase this year and talk of only possibly one next. We saw US 10 year treasury yields hit a low of 2.02% only a couple of weeks ago in a response to this, only to finish the week at 2.25%. This could be in response to the surprising inflation data we got last week and the continued strong jobs figures. One would think the Fed is expecting both core inflation and wage inflation to accelerate into the end of the year.

This also saw the AUD get smacked down from recent highs of 81c to sit around 79.55c vs the USD. This could be a white knight for the RBA who have noted a high AUD may slow the Australian economy. If the US do follow this road map, in terms of their cash rate, this should put downward pressure on the AUD and possibly see it in the low 70s again. This is provided that the RBA keep our own rates on hold for the majority of that time. There has been more talk of rate normalization by the media and a couple of the big banks this week. NAB going as far to suggest we may have up to two rate increases by June 2018. I feel our first won’t be until June 2018, but one thing is for sure, there will be a rate increase or two in Australia next year.

The next set of data was more a spread of data across the Eurozone. Many European countries released their manufacturing PMI numbers for September during the week. Spain, Germany & France all released their own individual sets of data. All three were on the up and did beat forecast. Then there was the Eurozone manufacturing PMI which came in at 58.2, versus the 57.1 expected and 57.4 read last month. This continues the trend of astonishingly strong manufacturing data that has been fed from Europe over the last 12 months. It really has been a source of unexpected strength and does bode well for world economic growth. It also puts upward pressure on commodity prices and eventually inflation. There is actual real talk of rate increase before the end of the year in the UK, because inflation data has been so strong of late.

Much like economic data, company news was so very quiet this week. We did have TPG Telecom (TPM) report their full year results with some familiar trends and mixed results. The overall numbers for 16/17 were slightly above forecast and solid overall. NPAT was +16% to $417mill, EBITDA +8% to $835mill and revenue +4% to $2.5bill. They did cut their final dividend to 2cps from 7.5cps in 2016. The cut was expected to help fund their new mobile phone network, but the market didn’t expect it to be this harsh. TPM also released their guidance for 17/18, which also disappointed the market. In the end they see EBITDA coming in at $800 - $815mill for the next financial year. This would put it below 16/17s result. They are citing NBN margin pressures as the reason why the result could be lower.

TPM only trade on a current PE of 10x but as we saw with guidance earnings are expected to come down. Also given the fact TPM will spending vast amounts of capital in the next few years constructing their mobile network, and the current telecommunications sector climate, the market seems to be giving TPM a wide berth; and probably rightly so. I have been burnt, like many, by TPM and others in the sector in the last 18 months and nothing I see here will entice me back in. Just so many unknowns and too much competition in the space to fill me with any confidence.

If you haven’t already guessed this is going to be a very short wrap this week. Simply not much to touch upon plus you all did get a bonus article this week with my lithium coverage. It was a sea of red for most sectors on the market this week and the gains that were to be had were minimal at best. The gold sector was hit the hardest with the underlying commodity coming under pressure with the threat of rate rises again presenting themselves. The rest of the resources sector were also sold off as we saw a stronger USD force commodity prices down. Financials were basically the only place we saw gains as it looks as if the run up into the reporting season for NAB, WBC & ANZ has begun.

I expect to see some short term softness in the resources sector over the next eight weeks or so as the USD should continue to strengthen on the talk of cash rate increases. This naturally forces commodity prices down as they become more expensive to purchase due to their USD denomination. Health care should see some positive movement in that time as a defensive play. I have mentioned many times I expect weakness and a possible move down to 5,400 on the XJO in the short term. Also if the USD is going to rise and AUD is going to fall then this benefits most health care stock’s bottom lines. As I mentioned just before we should see some strength in the banks as they lead into their full year reports.

Just a quick couple of foot notes before I wrap things up. Technically the XJO is very close to breaking down below that 5,650 support. The sooner it does and dumps into 5,400 the sooner we can bounce and rally into 6,000. I have been harping on about this for a couple of weeks but it does look more likely as the day’s progress.

As I spoke of early commodities have been hammered a bit in the last week. Iron ore especially is now down 20% off its highs and has entered into bear market territory. Copper and gold also followed it down but in much smaller declines. Oil has managed to peek its head above $50 again as inventories start to get eaten into due to production/refining halts as a result of the hurricanes in the US. Aluminum, Tin and Zinc all remain close to recent highs though.

Economic releases will be sparse again this week with most of the focus to be on speeches from central bankers from across the globe. The New Zealand election is currently underway and is too close to call at this point. Could be another short wrap next week if there is no company news to touch upon.

Well obviously the highlight of my weekend was the Crows huge win on Friday night and qualification for their first grand final in almost 20 years. I attended the game and from the first bounce the Crows were fantastic and crowd was the loudest I’d ever heard. It was the most electric atmosphere I had ever experienced at a sporting event. My voice was certainly raspy on Saturday. Much of this week I will be trying not to think about the upcoming grand final. It’s going to be a nerve racking experience. Crows will go into the game as solid favourites but Richmond can beat most teams when they are on. Luckily we have a long weekend coming up as I may need it to recover, win or lose.

I hope you all have a wonderful week and stay safe. I’ll speak to you all soon. Go You Mighty Crows!!!

heath@hlminvestments.com.au

0413 799 315

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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.