ASX Weekly Wrap 02/10 - 06/10

The XJO finished the week +29.10 points or +0.51%, but most of the heavy lifting was done on Friday. We had our best day in three months on Friday as the XJO climbed 58 points and pushed itself into positive territory for the week. There was lower than usual volume put through the XJO due to China being on public holidays all week. The US hit record highs a couple of times as talk of new tax reforms buoyed the market. Overall we continue to underperform our US counterparts by some margin.

A few important data releases this week. The first is from the US and the much anticipated jobs data report for September. Numbers were expected to be bad due to the hurricanes that swept across the country a few weeks ago. In the end the US lost -33,000 jobs after an addition of +90,000 was expected. The unemployment rate dropped to 4.2% from 4.4% due to lower than expected participation rate. Finally hourly earnings jumped to +2.9% from +2.5% as there were less lower paying jobs in the mix once again due to the hurricanes. It was always going to be a skew this month due to the abnormal impact of the weather events last month. Not much is being read into these figures at all and will likely be ignored moving forward. We will more than likely see a recovery next month, maybe larger than expected, as Houston and Florida start to repair their state.

The rest of the data came from local sources and first up were our retail sales for August. To say they were disappointing is an understatement. The figures came in at -0.6% for the months and July’s figures were revised down to -0.2% as well. We did see stronger figures in the month previous to July, but this could have been skewed due to end of financial year spending due to Government tax incentives. Once again it shows the problem in Australia with low inflation, still lots of slack in the jobs market and low wage inflation. People are not as willing to put their hands in their pockets and spend. It also must be noted that our retail figures do not catch all spending. Our online spending, for instance, is not capture by the data at this point in time. I dare say retail figures will only recover once we some uplift in wages. As a result the retail sector was sold off on Thursday when the data was released. The likes of HVN, MYR, JBH, SUL etc were all down 1%+. As I have repeated many times the retail sector remains an AVOID for me still. Not only do we have soft retail data but margins and earnings will come under immense pressure when Amazon does eventually establish itself here.

The second lot of data to be released came in the form of our trade balance for August, which was much more positive than the retail figures. We came in with a surplus of +$989mill when only a surplus of +$875mill was expected. Exports rose +1% mainly due to the increasing sale of LNG, whilst imports remained flat. This side of the Australian economy has been very strong for some time now, but we are yet to see it flow through elsewhere. You would think with a falling AUD this would only continue to improve as the value of our exports become cheaper to our trade partners. It’s very encouraging data that the figures continue to be so strong even when the AUD did climb as high as 0.81 vs USD.

Finally we had the RBA meet during the week to decide on our cash rate for October. As expected they kept the rate on hold at 1.50%. This was the 14th month in a row the RBA have kept the cash rates on hold and I doubt that will change any time soon given those retail figures. There had been some talk in the last few weeks of rates increasing by June 2018, but I doubt the RBA will look to do this until both wages growth and retail spending improves. Maybe an increase in the last quarter of 2018 will be on the cards.

The only company news worth covering this week surrounds QBE Insurance (QBE). As expected QBE updated the market early last week in relation to its exposure to the hurricanes that swept through the south east of the US last month. They have increased their provisions for large individual risk and catastrophe claims up to $1.75bill. They do note that they have not got a final figures on claims from these events but expect it to negatively impact earnings by $600mill by increasing this provision.

QBE is such a fickle stock with not only a recently volatile climate events impacting earnings over the last few years, but also cash rates and US bond yields having a major say. Whilst we should see increasing cash rates in the US have a positive impact on earnings the unpredictability of current weather patterns is concerning and hard to forecast future earnings on. I am tempted to just pack up shop and leave QBE alone moving forward. The market hates uncertainty, hence the share price may always be under pressure as a result. I had been trying to sell some of you out of QBE before this announcement, but now this out and the stock was punished hard we may have to wait to get everyone else out. We should see a recovery at some stage in line with hawkish rate news from the US. Feel it’s time to put general insurance companies on the avoid list along with retail.

From a sector point of view it was mostly green this week. Resources, gold and health care were the best performing sectors whilst property trusts and utilities were the worst. We saw a recovery in the resources stocks as metal prices were flat as a result of China being shut for business. Elsewhere we saw some timid gains with no impacting news.

Not much to talk about from a commodity point of view or technical aspect on the XJO. Commodity prices were timid during the week due to the China closure and the XJO technical story remains the same. A continued grind down of lower highs with support remaining at 5,650. I will cover these both again next week.

Another quiet week ahead of us on the economic front. No data to speak of locally but we have the Chinese trade balance for September out on Thursday. We also have US monthly PPI and CPI figures out in the second half of the week. A few Fed members also speak this week so we may get more direction in terms of where rates are headed in the US.

With the warmer spring weather upon us I spent Saturday afternoon at the beach with the family. Was just enjoyable to relax and enjoy the blue skies, whilst taking in the beautiful scenery. I also took advantage of the weather to get some gardening work done. It just never ends, still have a lot to do. Hope you all have a very enjoyable week and stay safe. I will speak to you all soon. Go Crows!

heath@hlminvestments.com.au

0413 799 315

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