ASX Weekly Wrap 11/06 - 15/06

In a shortened trading period the XJO enjoyed another healthy week with a 48.80 point gain or +0.81% despite trade war fears rising again between the USA and China. In fact we had our best one day rally of 2018 on Friday when the index rose as much as 1.3% to close out the day. It seems the XJO is finding some strength in the weakness of the AUD as our market becomes cheaper for international investors. It’s also seen a flurry of takeover offers come in for Australian listed companies, but I will talk more about that later.

To kick it off this week we will have a quick look at Australian jobs figures for May. We saw +12,000 jobs added to the economy for the month, as part time positions climbed 32,000 and full time positions lost 20,000. This also saw the unemployment rate fall to 5.4%, despite the weaker the expected result. The participation rate fell to 65.5% which contributed to the fall in the unemployment rate. As per the theme for 2018 it’s steady as she goes for the jobs market. After such a strong 2017, 2018 has been a lot weaker. It also shows there is plenty of slack left in our market. The positives are that ANZ jobs ads saw a strong rebound on its last read which means employers are still looking to hire.

Heading over to the US now we saw their inflation figures for May released in what was a strong read again. Year on year figures saw inflation climb to +2.8%, above the +2.7% expected and month on month figures saw a +0.2% read, which was in line with what was expected. Again this sits well above the 2% target rate set by the Fed, which they again stated they are comfortable with.

The Fed also had their monthly meeting to decide on the US cash rate and as expected they increased it by 25bp to 2.00%. They also signaled that they would probably lift rates another two times in 2018, taking it to four increases for the year, due to stronger than expected economic data of late. This has a few implications for bond yields, the AUD & gold. US 10yr bond yields still sit below recent highs at 2.90%, which suggest this latest round of increases were largely factored in. The Feds commentary around 2019 has not changed, hence keeping them lower than they were previously. However if we do see strong economic data continue to occur I would expect yields to stay above 3%. The AUD has progressively moved lower on the back of the higher rate expectations in the US. Please note that the US cash rate sits at 2.00% now vs our local rate of 1.50%. Obviously this makes the US a more attractive investment case as you are getting more return for cash than you can here.

Finally the old Gold/US rates relationship has returned with gold falling on the back of higher US rates. Gold peaked at $1360oz in mid-March and now sits around $1280. We have had two rate increases in this time. Once again the theory is that gold falls as US rates rise as US bonds can again provide a better return than is possible in gold. Remember gold does not yield hence you are relying on capital gains/preservation if you are investing in the precious metal. At this point the US economy is steaming along and global risks are fairly low, hence why gold has lost a lot of its luster.

The final piece of news on the economic front comes the way of China who released their monthly retail, industrial production and fixed asset investment data. Retails sales came in at +8.5% (+9.6% expected), Industrial production +6.8% (+6.9% expected) and fixed asset investment +6.1% (+7.0% expected). Overall is was fairly soft set of numbers that missed forecasts by a decent margin. Once again one set of numbers does not set a trend and we had a fairly strong set of numbers last month. What it does suggest is still a robust Chinese economy, growing within its expected target range.

I just want to quickly touch upon the latest ‘trade war’ fears that emerged late last week between the US & China. Late last week Trump formalized $US50bill of Chinese goods that will be subject to a 25% tariff starting the 6th July. Back in April, when these tariffs were originally revealed, China proposed $US50bill of US goods that would be subject to a retaliatory tariff. Today Trump has also announced he is having his staff look into a possible $200bill list of Chinese goods to place a 10% tariff on if they don’t reverse the proposed tariffs and current tariffs they have on US goods. This has seen US futures fall triple digits and the Shanghai index down almost 3% in early trade. My comments on this remain largely unchanged from the last time I spoke about them. I still believe this is a part of Trump’s aggressive negotiation tactics and posturing. Even though they have a date it’s still a few weeks off which gives them plenty of time to come to an agreement. Also the date could be pushed back as were the dates for steel and aluminum were. As we have seen in our market today, currently up 0.5%, despite this news we remain positive. This is because we are highly unlikely to be subject to any tariffs with the US as we run a deficit with them and we could actually benefit from it with the US/China turning to us for products to replace tariffed goods. I am confident the US & China will come to some sort of arrangement in the short term to put the pause button on this whole ‘trade war’ for the near future.

With the weakened AUD we have seen a raft of takeover offers emerge from overseas companies for their ASX listed counterparts. Just in the last few weeks we have had offers for Investra (IOF), Sirtex (SRX), Gateway Lifestyle Group (GTY) and APA Group (APA). Then of course you can add the failed Santos (STO) takeover attempt and the successful Acconex (ACX) to that list, which were earlier in the year and late last year. All of these offers have come internationally and mainly because they can pay a discounted rate due to our weaker AUD.

The stock I will be covering today regarding the recent acquisition activity is APA Group (APA). Mainly because it’s a stock most relevant to me and my clients. Mid last week APA received a $9bill takeover offer from Hong Kong’s CK Infrastructure Holdings Ltd. It sets the takeover at $11 per APA share and a 33% premium to its last closing price. APA has asked shareholders to take no action whilst they evaluate the takeover.

It is in my view that this takeover will not go ahead, and nor should it. APA owns over 9,000 miles in pipelines along with interests in power stations, gas storage facilities and wind farms. I feel that in the interest of our national security that so much of our energy sector is not handed over to a company governed under China rule. There is also precedent for this as in 2016 the Government blocked a takeover bid by the same company for Ausgrid on the grounds of national security. The market is also only pricing APA at $9.90, when the bid is at $11, this suggest the market does not think this bid is likely to succeed. What this bid could do is drag other offers out of the shadows, hence it’s probably best to sit tight at the moment and see how this plays out.

As you would expect most sectors finished the week in the green. Telecommunications and Utilities were the best performers as TLS jumped on the back of positive sentiment leading into its investor day this week. Utilities jumped on the back of the takeover bid for APA. Health care and resources feel on the back of softer commodity prices and the AUD gaining back some ground on the USD.

The XJO remains in that bullish uptrend and looks set to test the recent highs (black line) again around 6,150. If we can break that I feel we will see 6,250 very quickly. In the next couple of weeks we may get some sideways movement as the trade wars issue is worked through and we come into the end of the tax year. Mid-July is usually where we see the XJO wind up again leading into reporting in Aug/Sep.

That’s enough from me as this week was dominated by macro news and is a trend that I feel will reside until we get close to reporting season. Might get a few earnings downgrades/upgrades in between though. Had a fairly quiet weekend just passed as we were able to get a babysitter and dragged the wife to see the latest Star Wars movie. I enjoyed it immensely and thought it was really well done. Wife even said she liked it, which was surprising. Just a quick reminder that the EOFY is only two weeks away so if you need so capitalize on some gains/losses let me know. Hope you all have a wonderful week and stay safe. 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.