Wealth Managed - 19 April 2016

By David Lane - April 19, 2016

The Australian dollar continues to defy gravity.

A much stronger week last week, with the ASX200 rising 4.5%. The sectors that have pulled the index down over recent months lead the market higher, as investors began to find value in the oversold miners, banks and energy stocks.

The Australian dollar continues to defy gravity (and the dollar bears), strengthening through the week and further overnight following the lack of agreement between the major oil exporting nations.

The continued strength of the dollar, recoveries in commodity prices and a more buoyant equity market are all indications that the global investment environment is improving, with market participants returning to risk assets.  With record low global interest rates, this is not surprising - although it is encouraging that reality is beginning to mirror our fundamental beliefs.

In spite of the IMF downgrading it's expectations for global growth, and constant concerns about China's growth, the official GDP growth figure for the Chinese economy was within analyst expectations at 6.7%.  There is no doubt that the make-up of the economic activity in China is changing - and will continue to change over time - but their activity is still the envy of most nations.  On a positive note, the Chinese government has committed to some action which should continue to support growth, such as supporting the property market.  On the other hand, the growth came with a significant increase in debt which means this growth must be viewed with a level of caution.

Economic News 

  • Australian new housing finance lifted 3.8% over March, with a rebound in investor finance contributing to the relatively strong result. Investor finance rose 4.1% month on month, the strongest outcome for investor finance since March 2015. The rebound in investor activity is consistent with signs elsewhere (most notably in auction clearance rates) of a rebound in housing market activity in the first quarter of 2016, following softness towards the end of 2015.
  • Also positive in Australia was labour data, with employment numbers rising by 26,000 and the unemployment rate falling to 5.7% in March, the lowest level since September 2013. While some of the detail of the data was soft (hours worked slumped and the participation rate of 64.9% remains at a six month low), the improving trend in the unemployment rate is likely to keep the RBA on hold.
  • Business conditions and confidence improved during March, with overall conditions up three points to an index level of 12, which is well above the long run average level of five. The improvement was driven by positive results in trade, profit and employment
  • US retail sales declined 0.3% last month despite expectations of a 0.1% rise due to a significant cut back in automobile purchases.  Since consumer spending accounts for around 70% of US economic activity, the weakness in the reading suggests that the US economy has hit a soft patch despite improvement in the labour market and subsequent wage growth.
  • The Bank of England voted unanimously to leave its policy at a record low 0.5%, as the June 23 referendum continues to create a challenging backdrop for policy makers whom are unlikely to change interest rates until the outcome is known.
  • Negotiations in Doha between OPEC members and other oil producers ended without any agreement on limiting supplies.  Saudi Arabia’s Deputy Crown Prince said the kingdom wouldn’t restrain its production without commitments from other major producers including Iran.  The next OPEC meeting is June 2.
  • The IMF downgraded its world economic growth forecast to 3.2%, which was 0.2% below the previous forecast.  
  • China’s CPI for March rose 2.3% year on year, unchanged from the pace of inflation in the year to February. The result was a little below market expectations despite food prices rising 7.6% year on year (thanks largely to a strong rise in pork prices).  The CPI numbers remain well below the government’s target ceiling and provide Beijing ample room to continue easing fiscal and monetary policy.  
  • China’s gross domestic product rose 6.7% in the first quarter of 2016 from a year earlier, meeting the median projection of economists Bloomberg surveyed and in line with the government growth target of 6.5% to 7% for the full year.  The rise attributed to new credit, industrial output, fixed asset investment and retail sales all improving in March.

Company News

  • US Reporting Season kicked off with some big names reporting such as JP Morgan, Wells Fargo and Bank of America.  While the results showed weakening profits, analysts’ expectations in the lead up to reporting season were so negative leading that the majority of reports beat expectations and their subsequent share prices rose strongly in response.  This now leaves the US sharemarket only around 3% off its all-time highs.
  • Telstra has signed a $1.6 billion contract with NBN to provide planning, design, construction and construction management services within the existing HFC footprint. The new contract complements existing agreements between Telstra and NBN.
  • Blackmores recorded its biggest ever one-day market fall on the back of Chinese regulatory concerns, however chief Christine Holgate remains confident of the vitamin giant’s push into the economic powerhouse.
  • ANZ’s acting head of global markets Shayne Collins told staff the bank had decided to reinstate four of the seven staff stood down in November 2014 after a review found no wrongdoing from the corporate regulator’s probe into the bank’s alleged rigging of one of the nation’s key interest rate benchmarks.
  • Consumer research company Roy Morgan, which says Aldi’s share of Australia’s $90 billion supermarket sector continues to rise while Woolworths’ leading position erodes.  As of December 2015, Aldi holds 12.1% of the market, up from 11.6% in March. Woolworths still holds the top spot with 37.3% market share, though this has declined from 38.5%.
  • April 30th will mark the final day for failed consumer electronics retailer Dick Smith, with the receivers announcing an updated timetable for the closure of its 35 stores across the country.

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