Investment Week In Review - 2 May 2016

By Marcus Damen - May 2, 2016

Surprise negative inflation figures lead to a quick fall in the Australian dollar.

News in Review

  • Consumer prices unexpectedly fell 0.2% during the March quarter (markets have been expecting an increase of 0.2%). This was the largest quarterly fall in inflation since December 2008 and the lowest annual rise (1.3%) since June 2012. The most significant fall occurred in transport (–2.5%) due to the effect of a lower oil price on fuel. Recreation and culture (–1.0%) was the second most significant contributor as a higher Australian dollar impacted tourism. 

  • The U.S. economy expanded in the first quarter at the slowest pace in two years as American consumers reined in spending and companies tightened their belts in response to weak global financial conditions and a plunge in oil prices. Gross Domestic Product rose at a 0.5% annualized rate after a 1.4% fourth-quarter advance. 

  • Sales of new homes in the U.S. declined by 1.5% for a third month, reflecting the weakest pace of demand in the West since July 2014. New-home sales, which account for less than 10% of the residential market, are tabulated when contracts get signed and are therefore generally considered a timely barometer of the residential market.

  • The U.S. Federal Open Market Committee (FOMC) left interest rates on hold last week, as widely expected by market participants. The FOMC omitted previous language that “global economic and financial developments continue to pose risks,” instead saying officials will “closely monitor” the world situation. The change signals the Committee’s comfort with economic growth and stability in financial markets.

  • The Eurozone economy grew at a faster than expected 0.6% in the first quarter of the year.  The Eurostat figures also showed the unemployment rate fell to 10.2% in March; the lowest rate in four-and-a-half years.  The latest growth figures now mean the Eurozone’s economy is at last bigger than it was before the start of the Global Financial Crisis eight years ago.

  • The UK economy grew at 0.4% in the first quarter of 2016; the 13th consecutive quarter of growth.

  • The Bank of Japan held off on expanding monetary stimulus, as Governor Haruhiko Kuroda and his colleagues opted to take more time to assess the impact of negative interest rates. The decision came shortly after inflation for last 12 months in Japan fell 0.3% (widely expected by the market). Core inflation (stripping out energy and food) rose 0.7% for the year.

Comment

Given the surprise negative inflation figures, the Australian dollar quickly fell (-1%) as market expectations for a rate cut at tomorrow’s RBA board meeting increased to a 50% chance. 

The key question the RBA will be asking is whether the fall in inflation is systemic or simply a one off event.  If systemic, then we can expect a deflationary period and the RBA will have move to cut rates.  If it is simply a one off event then the RBA can look past this and keep rates on hold. 

The RBA has a long history of looking through short term issues (such as fluctuating petrol prices) and keeping its eye on the medium term.

The Week Ahead

  • Australia: The Reserve Bank of Australia will announce the Cash Rate; the Australia Treasury will release the Annual Budget; Building Approvals, Retail Sales data and the Trade Balance for March will be released. 
  • US: Manufacturing Purchasing Managers Index data for April is due; Employment data for April is due. 
  • Europe: European Central Bank President, Mario Draghi, is due to deliver a speech titled "The future of financial markets: A changing view of Asia" at the Asian Development Bank annual meeting in Frankfurt.
  • UK: Manufacturing Purchasing Managers Index data for April is due. 

Company News:

  • Wesfarmers Limited retail sales grew 5.7% during the March quarter, largely underpinned by continued market share gains from Coles and very strong performances from Bunnings and Kmart. Management noted that persistent warm weather has impacted the performance of winter categories in both Kmart and Target which will likely see higher clearance activity over the next quarter.

  • Fortescue Metals Group are looking to continue to reduce its debt burden by repaying or calling its debt using its free cash flow generated through higher iron ore prices.

  • Resmed Inc. third-quarter results have come in mixed as the medical equipment maker spends more on research and new products. Net income fell 3% to $US88.5 million ($A114.28 million) in the three months to March 31, from $US90.9 million for the same period a year earlier, as R&D expenses rose 4%. 

  • Online real estate business REA Group has bought the Flatmates website for an initial $25 million.  REA, which operates realestate.com.au and is majority owned by News Corp, says it will pay cash for the Australian business and enter into a joint venture with its founders to expand internationally.

  • Newcrest Mining produced 637koz of gold during the March quarter, up 2.6% for the quarter, while copper production jumped 30% to 23kt during the period. 

     

Markets in review

 

Capital Return

   
 

Weekly

CYTD

FYTD

S&P ASX 200

0.3%

-0.8%

-3.8%

DOW JONES

-1.3%

2.0%

0.9%

S&P 500

-1.3%

1.0%

0.1%

UK FTSE100

-1.1%

0.0%

-4.3%

FRENCH CAC40

-3.1%

-4.5%

-7.5%

GERMAN DAX

-3.2%

-6.6%

-8.3%

JAPANESE NIKKEI

-5.2%

-12.4%

-17.6%

SHANGHAI COMPOSITE INDEX

-0.7%

-17.0%

-31.3%

$1 Australian buys you:

   $0.7653
£0.5226
¥4.99572
¥82.1475
€0.6723
$1.0984

Biggest winners and losers last week - by sector

 

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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