Investment Week in Review - 24 July 2017

By Marcus Damen - July 24, 2017

Pitcher Partners' wrap up of issues impacting the markets over the last week.

Comment

Several of the so-called 'Trump trades' were always going to be problematic for the US economy.   Trump's pro-growth, pro-inflation agenda pushed bond yields higher as soon as he was elected and this presented a challenge for a government with a high and rising level of debt as it increased the cost of servicing that debt.  The US dollar also bounced for the same reason and this presented a challenge for the competitiveness of the nation's exporters, whom Trump was promising to rejuvenate. 

However, six months into his term, these trades now seem to be at various stages of unwind, reflecting a market that has lost some confidence in the growth and inflation outlook.  While US dollar strength had pushed the Australian dollar from $0.77 down to $0.72, the little battler has now rallied back plus some, to over $0.79.   The Euro, which had been pushed down from approximately €1.10 to €1.05 is now approximately €1.15 against the US dollar.  Further, the 10 year US government bond yield which rallied from approximately 1.8% to 2.6% has now settled back down to about 2.2%. 

While some of this unwind may in fact reflect some loss of confidence in Trump's ability to deliver on his agenda, the irony is that the weaker US dollar and low bond yields may in fact increase the chances of him achieving his end-game, being higher growth and higher inflation.   As for Australia, however, a rallying currency could soon create its own problems and the RBA will be reluctant to add fuel to that fire by raising interest rates. 

News in Review

Australia

  • The minutes from last month’s RBA meeting were released on Tuesday which surprised the markets with a relatively hawkish commentary. The RBA commented that the neutral nominal interest rate would be about 3.5%, causing a stir currency and pushing the AUD/USD over $0.79.
  • Perhaps in attempt to dampen the Australian dollar, on Friday the RBA’s deputy governor (Dr Debelle) stated that the global hawkish commentary would not give reason for the RBA to raise interest rates automatically.
  • Australian unemployment came in stable in June at 5.6% showing relatively no movement from last month but a 0.1% decrease from June 2016. This was coupled with a 0.2% increase in the participation rate to 64.9% from June 2016.

US

  • Residential Building Permits increased 8.3% to an annualised rate of 1.22 million. The rise in June puts an end to a three month slip and was driven by single-family homes which rose 6.3% to an annualised rate of 849,000. However homebuilders cited an increase in the price of materials and said shortages of skilled labour were limiting construction.
  • Last week’s unemployment claims decreased to a 9 week low of 233,000 this is close to the lowest level since 1973 showing a reduced amount of slackness in the US job market.

Europe & the UK

  • The UK inflation rate slipped to an annualised 2.6% in June, the first drop since October. The decrease eases pressure on the Bank of England (BOE) as a minority of policy makers had supported an interest-rate hike last meeting.
  • Retail sales by volume increased by 1.5% in the 3 months to June, with increases coming across all store types. This follows a 1.4% decline during the previous quarter.
  • Annual inflation in the European Union has dropped from 1.6% in May to 1.4% in June. The lowest individual annual rates came from Ireland (-0.6%), Denmark (0.4%) and Romania (0.7%). The largest came from Lithuania (3.5%) and both Latvia and Estonia (3.1% each).

China

  • China’s economy expanded at an annualised rate of 6.9% in the second quarter, unchanged from previous quarter’s results. The rise represented a quarter to quarter rise of 1.7%.
  • China’s Industrial output jumped to 7.6% annualised return to June, up from 6.5% to the end of May, this is the equal strongest pace since the end of 2014. This was coupled with retail sales growing to 11% annualised to June increasing from 10.7% in May.

Japan

  • The Bank of Japan (BOJ) reiterated its commitment to monetary policy this week, pushing out their expected time to reach their inflation of 2.0% until the 2019 fiscal year. The BOJ minuted that they would continue to purchase Japanese Government Bonds at ‘more or less the current pace’ in seeking to guide inflation into the economy.

The Week Ahead

  • US: CB Consumer confidence, FED Funds Rate
  • Australia:  CPI q/q
  • Europe: German prelim GDP m/m, German Ifo Business Climate.
  • UK: Prelim GDP q/q

Company News

  • Santos (STO) lifted its full year production and sales guidance after higher liquefied natural gas prices contributed to an improved quarterly performance. Santos achieved total sales growth of 12% in the three months to June to $US769 million. Santos now expects to produce between 57 and 60 million barrels of oil equivalent in 2017, an improvement on its previous guidance of 55 to 60 million barrels. Santos has also lowered its forecast for upstream production costs. The improved forecasts sent Santos shares higher, up 22.5 cents or 7.45% to $3.24.
  • Shares in South32 (S32) fell after the diversified miner’s annual production of many commodities, including coal, dropped and the company missed its full-year production guidance on some of them. Bad weather and challenging conditions at various operations impacted South32’s performance over the 2016/17 full financial year. South32 missed its annual production guidance for Worsley alumina, South African energy coal, Australian manganese ore, silver and lead. Operations at the Appin colliery were suspended in June. Shares in South32 were 6.5 cents, or 2.29%, lower at $2.77.
  • Shares in Myer (MYR) plunged to a record low after it cut its profit forecast and announced a series of major write-downs on key brands including its failed Topshop experiment. The department store chain has also announced its deputy chief executive is leaving the business while its full-year profit appears to be mostly wiped out. Myer’s share price plunged more than 9% following the trading update this morning to less than 74 cents.  The retailer has cut its target for underlying profit to between $66 million and $70 million for its 2017 financial year, which finishes this month. It has previously pledged to deliver its first underlying profit growth since 2010 by beating last year’s haul of $69.3 million.

Markets in Review

 

Capital Return

 

 

 

Weekly

CYTD

FYTD

S&P ASX 200

-0.7%

1.0%

0.0%

DOW JONES

-0.3%

9.2%

1.1%

S&P 500

0.5%

10.4%

2.0%

UK FTSE100

1.0%

4.3%

1.9%

FRENCH CAC40

-2.2%

5.3%

-0.1%

GERMAN DAX

-3.1%

6.6%

-0.7%

JAPANESE NIKKEI

-0.1%

5.2%

0.3%

SHANGHAI COMPOSITE INDEX

0.5%

4.3%

1.4%

ASX200 Biggest Movers for the Week

$1 Australian buys you:

Security

LastPrice

AUDUSD

0.7914

AUDGBP

0.6088

AUDCNY

5.3514

AUDJPY

87.9500

AUDEUR

0.6781

AUDNZD

1.0616

ASX200 Sector Performance for the Week


Contact our experts


Other articles


 

Top of Page







IN THIS SECTION:


Rob Southwell

Sydney

Managing Partner and Partner – Private Clients Group


> View profile

John Brazzale

Melbourne

Partner and National Chairman


> View profile

Michael Minter

Newcastle

Managing Partner


> View profile

Bryan Hughes

Perth

Chairman


> View profile

Tom Verco

Adelaide

Managing Principal - Private Clients


> View profile

Ross Walker

Brisbane

> View profile



Partnership fraud

SUCCESS

Paperwork and independent advice saves partnerships from fraud

Discover more

Kia Ora Horse Stud

CASE STUDY

Pitcher Partners fills a Financial Manager gap to keep the business on track

Discover more

Fuel Injection Company Administration

LEADERSHIP

A fuel injection company began life as an Australian public company before being acquired by a UK publicly listed company while in the research and development stage of a “green...

Discover more



@PitcherPartner LIVE | Taking the guesswork out of international business We are incredibly lucky to be joined by international b… https://t.co/RusFmwJuSP