Investment Week in Review - 8 February 2016

By Michelle Heffernan - February 8, 2016

We question if the US economy can in fact sustain further rate rises as the global economy becomes more volatile?

News in Review

  • The Reserve Bank of Australia (RBA) left the cash rate unchanged at 2%, with the accompanying statement continuing to insinuate a slight easing bias.  The statement highlighted recent improvement in the labour market but also recent financial turbulence that could foreshadow weaker global and domestic demand.  

  • The RBA’s forecast for Australia’s growth at the end of 2017 was trimmed to 3.0% from November’s forecast of 3.5%, while inflation is now forecast to be 1.5% by mid-2016, down from November’s forecast of 2.0%.
    Unemployment in the US improved yet again, to 4.9%, with 151,000 jobs added for the month of December.  There was a slight increase in the length of a typical work week in January, resulting in higher income levels. 

  • The level of assets (foreign reserves) held by China’s Central Bank has been falling for the past 12-18 months.  Reserves fell by almost $100 billion in January, as the bank increased outflows to combat the yuan devaluation and the slowing pace of economic growth.

  • Australia's trade deficit widened unexpectedly to $3.5 billion in December after a sharp fall in the value of iron ore exports- down 5% for the month.  The deficit represents a 30% rise from the $2.7 billion deficit in November and comes as the fourth highest in history.

  • Australia’s December retail sales were flat despite expectations of a slight rise.  While some of the weakness may be attributable to mortgage rate increases late last year, the weakness of discretionary segments (restaurants, café, and takeaway food) suggests there may also have been a loss of consumer confidence.  Pleasingly however, Victoria recorded the fastest annual percentage increase in retail sales up 5.8% for the year.

  • Building approvals were higher than expected in December, rising 9.2% for the month. A rebound in private other dwelling approvals (up 12.8%) was the main driver of the growth.  Private house approvals were also robust, up 5.4% following three consecutive months of declines. 

  • Japan joined the European Central Bank in moving to negative interest rates.  This was initially well received by markets but was partially reversed by soft data from the manufacturing sector. The main culprit was China, where the official manufacturing index (PMI) came out a weaker than expected 49.4 in January, remaining below the 50 mark for a fifth consecutive month.  On a positive note, the private service sector rose in both China and Japan.

  • The Bank of England left its policy unchanged at 0.5%, the decision being largely expected although this time the Monetary Policy Committee’s vote was unanimous.  

  • The annual growth rate of credit extended to European residents slowed to 2.3% in December (down from 2.6% recorded in November). Credit granted to general government was unchanged at 7.8% YoY in December. The annual growth rate of credit to the private sector slowed to 0.8% in December (versus 1.2%yoy in November). The European services PMI remained resilient, with the final January reading confirmed at 53.6.

     

Comment

In further evidence of an improving US economy, the unemployment rate dropped to 4.9% with 151,000 new jobs created in December. Improvements such as this place pressure on Federal Reserve Chairman, Janet Yellen to raise rates at the next Federal Reserve meeting. Some economists are predicting four rate rises this year in the US.  

We question if the US economy can in fact sustain further rate rises as the global economy becomes more volatile? Ratings agency S&P follows a similar line of thinking. S&P has cut its expectations for US rate hikes down to two rate rises this year (from four) saying low inflation and global market volatility is likely to hold the Fed back. The agency does not expect a cut in the upcoming meeting in March.

The Week Ahead

  • US: Labor Market Conditions Index (Jan), Unemployment Rate (Jan)
  • Australia: Home Loans (Dec)
  • China: Foreign Exchange Reserves (QoQ)
  • Eurozone: Sentix Investor Confidence (Feb)  
  • UK: NIESR GDP Estimate (3M) (Jan)
  • Japan: Eco Watchers Survey: Current (Jan)

Company News:

  • NAB/Clydesdale Bank Demerger: National Australia Bank delayed the listing of Clydesdale Bank by 24 hours to allow institutional investors to digest the impact of a potential downgrade to one of Clydesdale's credit ratings. Clydesdale Bank shares are now trading on the ASX under the code CYB.

  • BHP: Standard & Poor's downgraded BHP’s credit rating by one notch.  S&P has warned BHP to cut its dividend by a sufficient degree to ensure the company does not face a second credit rating downgrade.

  • Google/Alphabet: Google’s parent company, alphabet, has overtaken Apple as the largest company in the world.  Alphabet has a market cap of $547 billion whilst apple has slipped to $529 billion after falling over 20% since November. 

  • BP Plc: US listed company, BP reported a 91% decline in profit after oil prices dropped to the lowest level in a decade. 
    LinkedIn’s share price plunged over 40% on Friday, wiping out nearly $US11 billion ($15.56 billion) of market value, after the social network company shocked Wall Street with a revenue forecast that fell far short of expectations.

     

Markets in review

 

Capital Return

   
 

Weekly

CYTD

FYTD

S&P ASX 200

-0.6%

-6.0%

-8.8%

DOW JONES

-1.6%

-7.0%

-8.0%

S&P 500

-3.1%

-8.0%

-8.9%

UK FTSE100

-3.9%

-6.3%

-10.3%

FRENCH CAC40

-4.9%

-9.4%

-12.3%

GERMAN DAX

-5.2%

-13.6%

-15.2%

JAPANESE NIKKEI

-4.0%

-11.6%

-16.9%

SHANGHAI COMPOSITE INDEX

0.9%

-21.9%

-35.4%

$1 Australian buys you:

   $0.7184
£0.4937
¥4.7147
¥83.9245
€0.6419
$1.0744

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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