ASX Weekly Wrap 28/05 - 01/06

The XJO was lead mainly by overseas news during last week as it saw its third consecutive week of losses. The XJO finished down 42.40 points or 0.70%. Our high was 5,995.30 on Thursday and our low was 5,964.10 Wednesday.

Starting in the US a few macro events shaped equity markets this week. The on again, off again peace meeting between the USA and North Korea has been scheduled to be on again mid-June. This helped markets later in the week but was offset by Trump declaring Mexico, Canada and the EU would soon be subject to steel and aluminum tariffs. Once again no details were released as part of the announcement such as effective date or the tariff percentage, so one could assume these are still heavy handed negotiation tactics. Obviously fears are this escalates into a full on trade war, especially with the EU, is the main concern here.

On Friday night the monthly US jobs report was released for May, in what was a big beat on all fronts. The US added 223k jobs in May and the unemployment rate fell to an 18 year low of 3.8% on the back of this. The consensus was for +190k jobs added and a 3.9% unemployment rate. Wages also rose higher than expected coming in a +2.7% vs the +2.6% expected. US 10yr bond yields rose on the back of this back up to 2.90% after falling as low as 2.78% earlier in the week. This was on the back of fears that the Fed were going to have to lift rates faster than expected during 2018/19 due to the strong economy. However during the week one of the Fed members did mention that the board was happy with how inflation was tracking a period above 2% would be tolerated for some time due to how long it has spent below it. They also mentioned that they didn’t see any further rate increases outside of those planned at this stage.

Once again, after a soft period during the colder months, it seems the US economy is heating right up again. A few slices of data released in the last week or so have been ahead of expectations so we should expect to see a strengthening US economy leading into Christmas again.

Over to China we saw the manufacturing and services PMI released by the NBS on Thursday whilst the Caixin manufacturing PMI index was released on Friday. The set of figures from the NBS came in much higher than expected with manufacturing PMI reading 51.9 vs the 51.3 expected and 51.4 last month. The services read also came in stronger at 54.9 vs 54.8 expected and the 54.8 read last month. The Caixin PMI manufacturing index, which is independent but mainly focuses on small to medium sized business, came in at 51.1 on Friday. Again this was higher than the 51.0 expected but the same as the 51.1 read last month.

Again after a period of softer data earlier in the year the May PMI numbers were very solid all round and could point to an acceleration in the economy again. However like with softer numbers we do want to see a few stronger sets of data strung together in a row to establish a trend as just one set of numbers could be an anomaly. Traditionally the second half of the year is stronger for the Chinese economy.

Finally as I stated in my email last week I wanted to touch on the situation with Italy and Europe. Last weekend a proposal to form a coalition Government was rejected by the opposition party, which looked like it was going to send Italy to a snap election. This meant that their right wing party had a chance at gaining total control of parliament and hence force Italy to leave the EU. This sent bond markets into a volatile and wild ride during the week, in some moves I have never seen in my time within the industry. The situation has settled now to a mild simmer as Friday morning, our time, Italy had agreed to form a coalition Government. Whilst the right wing will still be in power the opposition rejected their first choice for economy minister as he was advocating for them to leave the EU. Friday morning they put fourth an alternative to him, who whilst has his grievances with the EU, wants to stay. The drama may not be over though as Italy still has to negotiate terms with the EU over some policies and funding which they still remain well apart on. If things were to get sour here it could still mean Italy leaves the EU, especially since it has been running strong account surplus’ since 2012. This puts it in a very strong position to leave if it wanted to.

In some more troubling news for the Euro area, Deutsche Bank credit rating was cut to a +BBB during the week, by S&P, from a –A due to debt concerns surrounding the investment bank. They were also put on a ‘monitor’ list in the US for troubled financial institutions. I feel the bank is a real threat to the global economy. If it were to go under it could have greater implications than the Lehman’s collapse due to its high commodity derivative exposure. At only $US24bill market cap it would be a smaller collapse but one that could still push us into the next GFC style crash. It’s nowhere near this threat yet, but it’s a situation that needs to be monitored closely.

Only a couple of companies to report on this week, so we will start off on some negative news first. Metcash (MTS) released an update on its wholesale business and earnings during the week. It advised the market that Drakes supermarket chain has decided not to extend its current contract with MTS past 2019. Drake’s currently uses MTS to supply its supermarkets in SA, but has advised it will not in the near future. It hasn’t indicated whether this will be the same for its QLD operations at this stage. MTS has not yet assessed the implications for this moving forward. Drake’s total sales in SA in FY18 were $270mill so they do have a large amount of business that runs through MTS.

In further negative news MTS expects to report total sales declines of 1.2% for the year ended 30th April and wholesale sales declines of 3.6% for the same period. MTS report their full year results on 25th June. The stock has fallen 21%+ on the back of this news after being bid up, over the last 12 months, on the rumour Amazon may possibly look to take over MTS for its distribution capabilities. I have never been a fan of MTS and wasn’t about to buy it on a rumour. Once again it shows the competitive nature of the retail space at the moment and how price deflation and increased competition is eating into margins.

Finishing on a positive note, Galaxy Resources (GXY), were able to sell some of their Argentinian lithium brine assets to POSCO for $US280mill. The tenements are in the northern part of the basin and contain 1.54mt of LCE. GXY will retain 100% ownership of its tenements in the southern part of the basin and use these funds to further accelerate development of these projects. The agreement is non-binding at this stage and subject to a few conditions.

Once again this is bullish news for the Lithium sector as it shows companies outside of the sector looking to get involved in the EV revolution. POSCO has already signed on for a lithium offtake deal via PLS earlier this year. They have signaled their interest in becoming involved in the lithium battery market and this potential deal only enhances this. It also shows the bigger players are keen to secure future supply and how tight the lithium market really is. POSCO is the world’s fourth largest steel producer located in South Korea.

GXY shares acted positively after the release of the the news trading up 10%+ on the back of it. It also helped drag the rest of the lithium sector up on the day. Fundamentals continue to improve remarkably for the lithium sector as the year goes on. It does look poised to start another leg up soon with the producers/near term producers leading the way. These include the likes of ORE, MIN, GXY, PLS, AJM, KDR & SYA. I keep promising another lithium update, which I do intend on getting to, I just need to allocate some time on it. I do have a few other speculative lithium stocks I do like the look of at this point as well, but will leave them for my next lithium article.

The banks weighed on the XJO during the week as the royal commission continued on and possible criminal activity by the ANZ was revealed. Energy saw heavy losses on the back of falls in the oil price due to possible increased production by OPEC. Telecommunications also had a tough week after TLS announced its earnings would come in at the lower band of forecasts. On the flip side health care again was strong as investors sought defensive plays. Utilities also saw some buying on the back of some positive news from AGL.

Technically there isn’t much to report on the XJO. We should see some consolidation here before our next move in either direction. The XJO was unable to break old highs, set earlier in the year, in our last run up, however they rarely do on their first attempt. After some consolidation in June and early July I’d expect us to have another go at it late July/early August before reporting season begins. At this stage short term upside is 6,250 and short term downside is 5,875.

That wraps up another weekly wrap. Not too much to concern ourselves with but I feel the European situation needs to be closely monitored. Some important data out this week domestically with ANZ Job Ads, Retail Sales and company profits out Monday. Wednesday sees the all-important GDP figures for Q1 2018 and Thursday is our trade balance for April. Nothing of note is scheduled company wise, but I’m sure something will come up. Hope you all have a wonderful week and stay safe. Talk to you all soon. Go 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.