Investment Week in Review - 1 February 2016

By Marcus Damen - February 1, 2016

The Bank of Japan’s (BoJ) move to negative interest rates was an interesting and surprising move last week and shows what is required to combat deflationary forces brought about by deleveraging and an ageing and shrinking population.

News in Review

  • The Bank of Japan adopted a negative interest rate policy on Friday while maintaining its record asset purchase plan.  Governor Haruhiko Kuroda’s board voted 5-4 to put an interest rate of -0.1% on current accounts held at the central bank.

  • US new home sales jumped more than 10% in December, the biggest month-on-month gain since August 2014 and to the highest level in ten months. Mortgage applications were up 8.8%, building on the 9% gain the prior week.  New home sales in 2015 reached an estimated 501,000, marking their highest annual level since 2007, accentuating the long trek back from the housing collapse.

  • Australia’s December quarter inflation in came in a touch higher than the market generally expected.  The headline Consumer Price Index rose 0.4% for the quarter and 1.7% for the year.  This number combined with the recent strength in the labour market means the Reserve Bank of Australia (RBA) is highly likely to leave the cash rate unchanged at next week’s first board meeting of 2016.  Inflation under 2% provides scope for the RBA to ease down the track if employment levels deteriorate.  

  • The Australian dollar broke through the US$0.71 mark, reaching a two-week high. Disappointing US durable goods weighed heavily on the US dollar.  It appears that there is significant downward momentum in US private domestic demand.

  • The US Federal Reserve left rates unchanged and said it is “closely monitoring global economic and financial developments…assessing their implications for the labour market and inflation, and for the balance of risks to the outlook.” Commentators noted that the overall tone in the statement was slightly more dovish than expected.

  • The euro area services sector saw a decline in January. In Germany, the services index declined but remains at a strong level. In contrast, the French services index improved on the month, showing some rebound from the December readings that were affected by the Paris terror attacks.

  • Preliminary estimates of GDP growth in the UK show an increase of 0.5% in the December quarter compared with growth of 0.4% in the September quarter.  Growth was largely the result of improvements in the services sector.

  • Crude oil prices jumped to a 2016 high on hopes that Russia and the Organisation of the Petroleum Exporting Countries (OPEC) would cooperate on production cuts.  Russia’s energy minister said Thursday that the world’s major oil-producing countries could discuss production cuts at a meeting in February aimed at finding a way to bolster weak oil prices.

Comment

The Bank of Japan’s (BoJ) move to negative interest rates was an interesting and surprising move last week and shows what is required to combat deflationary forces brought about by deleveraging and an ageing and shrinking population. Despite having official rates of less than 1% since for over 20 years, the BoJ is obviously of the view that the monetary settings are still too tight for the economy to grow sufficiently and is therefore now effectively charging banks to hold funds in reserve. The aim appears to be to incentivise them to lend the money out for a return instead. 

Japan is an example of why we shouldn’t expect that global interest rates will automatically rise back up from their current historically low levels, however economies with lower debt burdens, growing populations and better age demographics have a better chance of this occurring than others. No doubt this is part of the reason that China is abandoning the one child policy.   

It is interesting to note that India’s rate of population growth is currently almost 2.5 times faster than China’s and the fastest rate of growth in the world is occurring in Africa.  

The Week Ahead

  • US: Personal Consumption Expenditures - Price Index (YoY) (Dec).
  • Australia: RBA Interest Rate Decision, RBA Rate Statement. 
  • China: NBS Manufacturing PMI (Jan).
  • Eurozone: Markit Manufacturing PMI (Jan), Non-monetary policy's ECB meeting.
  • UK: PMI Construction (Jan), BoE Interest Rate Decision (Feb 4).
  • Japan: Foreign investment in Japan stocks (Jan 29).

Company News:

  • Asciano shares were suspended as a Qube consortium submitted a proposal to acquire the Australian ports and rail operator. The offer includes $6.97 of cash and one Qube share for every Asciano share, representing an implied value of $A9.17 per Asciano share based on its trading over the past 30 days.

  • The Supreme Court of Victoria has ordered Woolworths to pay more than $11 million in damages to a property developer in Bendigo, Victoria, after the supermarket giant abandoned its lease over a Masters store.

  • Santos has flagged write-downs and cuts to its oil and gas reserves as it joins the growing list of energy players hit by the slump in commodity prices. As oil prices hover around a 12-year-lows, Santos said it will push ahead with its business review focusing on preserving cash.

  • Anheuser-Busch InBev said on Thursday that it had cancelled US$42.5 billion of a record US$75 billion senior acquisition loan after raising a hugely successful bond which was used to repay part of the loan. The Belgium-based brewer, which is taking over rival SABMiller in a $100 billion-plus takeover, said it had raised about US$46 billion from a bond issuance which raised a $110 billion order book - the largest ever for a bond issue.

Markets in review

 

Capital Return

 

 

 

Weekly

CYTD

FYTD

 

S&P ASX 200

1.8%

-5.5%

-8.3%

 

DOW JONES

2.3%

-5.5%

-6.5%

 

S&P 500

1.7%

-5.1%

-6.0%

 

UK FTSE100

3.1%

-2.5%

-6.7%

 

FRENCH CAC40

1.9%

-4.7%

-7.8%

 

GERMAN DAX

0.3%

-8.8%

-10.5%

 

JAPANESE NIKKEI

3.3%

-8.0%

-13.4%

 

SHANGHAI COMPOSITE INDEX

-6.1%

-22.6%

-36.0%

 

$1 Australian buys you:

   $0.7134
£0.4953
¥4.6886
¥86.1555
€0.6540
$1.0924

Biggest winners and losers last week - by sector

sector performance chart

 

Biggest winners and losers last week - by company

 

Disclaimer

 
This material is intended for the use of the clients of Pitcher Partners Investment Services only.  It is current at the date of preparation, but may be subject to change.  This document does not constitute financial product advice.  It is of a general nature and has been prepared without taking into account any person’s objectives, financial situation or needs.  Before acting on the information you should consider the appropriateness of it having regard to your objectives, financial situation or needs and seek independent advice.  You should obtain and consider a Product Disclosure Statement in relation to any financial product before making any decision about acquiring the product.  To the maximum extent permitted by law, Pitcher Partners Investment Services Pty Ltd and its representatives will not be liable for any loss or damage incurred by any person directly or indirectly for any use or reliance on this document.

 


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