Market Matters Report / Market Matters Weekend Report 28 August 2016

By Market Matters 28 August 16

Market Matters Weekend Report 28 August 2016

Market Matters Weekend Report 28 August 2016

Overview
 
Last week the ASX200 again traded in a relatively quiet manner closing down only 0.2% although it felt worse after weak trading sessions on both Thursday and Friday. On the sector level the energy stocks fell 3.5% while the supermarkets' rallied 3.6%. We witnessed some significant moves on the stock level, assisted by the conclusion to reporting season  e.g. Flight Centre +6.5%, Perpetual +4.8%, Woolworths +4.2%, Oil Search -9%, IPL -4% and Vocus -4.8%. However the major game in town last week was interest rates and what was Janet Yellen & Co. going to indicate for US monetary policy going forward - the US has increased rates just once, last December, in over 7 years. Answer: US Fed Chair Janet Yellen made a "Hawkish" speech last night at Jackson Hole, increasing the possibility of a rate hike in September, and beyond:
 
"the case to raise interest rates is getting stronger as the US economy approaches the central bank's goals. I believe the case for an increase in the federal funds rate has strengthened in recent months" - snippets from Janet Yellen last night.
 
While she made understandable caveats around economic growth, employment etc. Ms Yellen said the forecasts show the Fed Funds rate settling ~3% going forward, well above most economists forecasts. Considering the Fed Funds rate was almost 10% back in the late 80's a bounce back towards 3% seems almost conservative but it is of course a 600% increase on today's level! We continue to believe that we have seen the low for bond yields and interest rates are about to slowly swing higher.
 
Last night optimistic comments on the US economy from Janet Yellen initially led the stock market up strongly only for Fed vice-chair Stanley Fischer to extinguish the rally by suggesting a rate rise in September was now a possibility - futures are pricing in a 42% chance of a hike in September and 63% for December. Equities simply cannot have their cake and eat it i.e. a strong US economy will lead to higher rates.
 
US Fed Funds Rate Monthly Chart
 
 
 
One chart that we continue to watch very closely is the US banking index which is very close (0.7%) to making an 8-month high; we are predicting a strong rally if they break this level. Importantly the Australian "big 4" banks make up over 24% off the ASX200 and they are not surprisingly highly correlated to their US banking counterparts. We know this is a theme that we have been riding for a while but the local banks have been outperformers over recent weeks and we believe this is likely to continue.
 
It's important to remember that bank profitability actually benefits from higher rates with current negative interest rates in much of the developed world having been a burden for global bank share prices. Even on Friday night when the Dow reversed 177-points to close down 53-points, on mention of a rate rise in September, the US Banks remained firm closing up 0.6% - one week does not make a summer but this feels like a cork about to pop.
 
Furthermore, when we look at the FTSE Global Banking Index it also looks set for a significant rally which is likely to be led by the European banks who are currently extremely depressed e.g. Deutsche Bank is trading around all-time lows, down over 40% in 2016 alone. Last comment on our bullish banking call is valuations.  Although the market is trading on a high multiple (around 17 times) which is above historical norms justified by low interest rates banks are trading on or around historical averages. However, if we think interest rates globally are going higher, and presumably this a result of improving economic conditions, then banks will benefit from actual higher rates (as margins improve) but they’ll also benefit from an improving economic performance given their earnings are widely exposed to the ebbs and flow of the economy. The key is that interest rates go up, but not quickly and not enough to put stress on borrowers.
 
Here's a quick look at PE’s; Banks 12.4x, Diversified Financials 16x, Industrials 17x, Defensives 19.1x, Resources 25.9x and O/S Growth 25.2x - no major surprises in these numbers but clearly banks have room to rally. If we apply the normal ‘10% bank discount’ which is typical for banks v the broader market, the sector could trade on 15.3 times – which is a +23% uplift.  
 
US S&P500 Banking Index Monthly Chart
 
 
 
FTSE Global Banking Index Quarterly Chart
 
 
 
Higher US interest rates are likely to support the $US which gained close to 1% yesterday. Ideally on a technical level we will see one final push higher in the $US over 101, prior to a major correction. We were previously targeting a move to $105 however we now believe this is likely to be too bullish . If this short-term $US strength unfolds it is likely to put pressure on commodity prices potentially enabling us to buy our targeted gold stocks at ideal levels i.e. Newcrest Mining (NCM) ~$21 and Regis Resources (RRL) ~ $3.50

US$ Index Monthly Chart
 
 
 
The retail sector has been very strong over recent months implying consumer activity is picking up, this suggests that further interest rate reductions are not required in Australia. It's our view that any further rate cut in Australia will be a direct need / hope for the RBA to get the $A lower.

Risk / Reward makes it hard to buy retail stocks just here but we would definitely not consider shorting them.
 
The Australian Retail Index Monthly Chart
 
 
 
Conversely, we continue to believe that stocks which have been treated like a "quasi-bond" will come under increased pressure moving forward e.g. Telstra (TLS) and Sydney Airports (SYD). Last night the Telco sector was weak in the US and this is likely to be reflected in our local market, TLS is already down over 10% for the year but we remain bullish Vocus (VOC) going forward and believe the stock is cheap for the growth it is currently offering. We will strongly consider increasing our 5% position in VOC if recent weakness continues under $7.80.
 
Vocus (VOC) Weekly Chart
 
 
 
On the commodities front Zinc hit a 15-month high last night as it continues to rally on concerns of a pending global shortage. We are bullish Zinc targeting significant more upside, this should aid our IGO position which has come under pressure recently following a weak result from Western Areas (WSA) and  to some degree probably tracking gold and copper’s weakness. This is a great example of supply-demand driving commodity prices with Zinc surging and copper continuing to drift lower at best.
 
LME Zinc Quarterly Chart
 
 
 
Standout technical chart of the week
 
Bendigo Bank has been a landmine for us in the past but we remain open-minded to all stocks going forward even if it requires a deep breath! We are currently positive banks and BEN has been exhibiting excellent momentum recently. BEN is trading on a estimated 2017 P/E of 12.50x in line with the sector, on the 6th of September ( 9 days away) it pays a 34c fully franked dividend i.e. its yielding 6.26% + franking.
 
We are bullish BEN targeting ~$12 with stops under $10.10 - not taking dividends into account.
 
Bendigo Bank (BEN) Monthly Chart
 
 
 
Summary

  • We apologies for the repetition of our view however there’s no change, we remain bullish equities, short term the ASX200 should hold the 5400 area.
  • Taking into account our positive view on the US stocks we do NOT believe it's time to sell stocks aggressively, just remain prudent on exposure.
  • Stocks that have had a relatively tough 6/7 years are likely to perform well over the next 3-6 months e.g.  the banks.


Now US equities are trading at fresh all time highs, our strategy has become clearly defined - we will be wearing our "Sellers Hat" slowly lightening equities exposure into strength but no hurry just yet.
 
What Matters this week
 
The ASX200's is set to open down ~5 points on Monday, it will be an interesting week after such a prolonged period of inactivity a move from the ASX200 is well overdue

Potential Investing opportunities for the coming week(s)

We are happily ~88% committed to stocks but expect to be reducing this position over coming months. We are still considering good risk / reward opportunities in the gold sector which appear to be looming on the horizon plus under $7.80 VOC looks cheap - we are considering switcing over our flat lining CSR position.

Also, BEN is looking interesting as an active style investment with a healthy dividend looming, a potential replacement for Macquarie for subscribers that agree with our banking view and who may have less exposure to the sector than we do.

Potential Trading opportunities for the coming week
 
Sorry but nothing clear at present.
 
Watch out for trading alerts.

Portfolio / Trade Holdings
 
The Market Matters Portfolio:
 
We are sitting on 11.5% cash after taking a healthy profit on our Macquarie (MQG) position. Taking profit on our MQG holding may sound strange considering our bullish banking view but we established the position around BREXIT and this has finally played out as we hoped. Put simply, we think it made sense to realise the profit prior to Janet Yellen's speech - note we still have 32% exposure to banks not including Suncorp = overweight.
 
Australian ASX200
 
The ASX200 has traded in an extremely tight range over recent weeks with a breakout either way a strong possibility after this weekend's Fed meeting at Jackson Hole.
                                                                                                                  
Chart 1 – ASX200 Monthly Chart


Chart 2 – ASX200 Weekly Chart


Chart 3 – ASX200 Daily Chart


Chart 4 - SPI (Share Price Index) Futures 60 mins Chart


Chart 5a ASX200 Banking Index Monthly Chart


Chart 5b ASX200 Financials Index (excl. REIT's) Weekly Chart


Chart 6  Volatility Index / VIX Weekly Chart


Chart 7a – The US 10-year Interest Rate Monthly Chart


Chart 7b – The US 2-year Interest Rate Daily Chart


American Equities

The American indices remain bullish medium-term but they are definitely feeling tired at present. We are still positive for the next few months / quarters, seeing ~6% more upside for the S&P500 but note we still believe the next MAJOR move will be down.

Chart 8 – Dow Jones Index Monthly Chart


Chart 9 – Russell 3000 Weekly Chart


Chart 10a – US S&P500 Index Monthly Chart


Chart 10b – US S&P500 Banking Index Monthly Chart


Chart 10c – US S&P500 Healthcare Index Quarterly Chart


Chart 11 – NYSE Composite Index Monthly Chart


Chart 12 – Russell 2000 Index Monthly Chart


Chart 13 – US NASDAQ Index Monthly Chart


Chart 14 – The Canadian Composite Index Monthly Chart


European Indices

The UK FTSE has been very strong making fresh highs since August 2015, assisted by a weak Pound, but still needs to hold the 6400 area to remain positive. The German DAX is trying to turn bullish but similarly needs to hold over 10,350.

Chart 15 – Euro Stoxx 50 Index Monthly Chart


Chart 16 – UK FTSE Index Weekly Chart


Chart 17 – Spanish IBEX Index Monthly Chart


Chart 18 – German DAX Index Monthly Chart


Asian & Emerging Markets Indices

The Asian indices have been fairly positive but initial targets have been met hence right here we are neutral awaiting what comes next.

Chart 19 – Hang Seng Weekly Chart


Chart 20 – China Shanghai Composite Index Weekly Chart


Chart 21a – Emerging Markets MSCI ETF Weekly Chart


Chart 22 – Japanese Nikkei 225 Index Monthly Chart


Australian Stocks

The Australian stock market has consolidated recent strength but the Banks must regain some "mojo" otherwise the ASX200 will unfortunately continue to underperform on the global stage.

Chart 23 – BHP Billiton ADR ($US) Monthly Chart


Chart 24 – BHP Billiton (BHP) Weekly Chart


Chart 25a – Woodside Petroleum (WPL) Monthly Chart


Chart 25b – Origin Energy (ORG) Monthly Chart


Chart 25c – Oil Search (OSH) Weekly Chart


Chart 26 – RIO Tinto Ltd (RIO) Weekly Chart


Chart 27 – Fortescue Metals (FMG) Monthly Chart


Chart 27b – Independence Group (IGO) Weekly Chart


Chart 28 – Newcrest Mining (NCM) Monthly Chart


Chart 29 – Regis Resources (RRL) Weekly Chart


Chart 30 – Northern Star Resources (NST) Weekly Chart


Chart 31 – Market Vectors Gold ETF Daily Chart


Chart 32a – Commonwealth Bank (CBA) Quarterly Chart


Chart 32b – Commonwealth Bank (CBA) Daily Chart


Chart 33 – ANZ Bank (ANZ) Weekly Chart


Chart 34 – Westpac Bank (WBC) Daily Chart


Chart 35 – National Australia Bank (NAB) Weekly Chart


Chart 36 – Macquarie Group (MQG) Monthly Chart


Chart 37a – Bank of Queensland (BOQ) Monthly Chart


Chart 37b – Bendigo & Adelaide Bank (BEN) Monthly Chart


Chart 38a – AMP Ltd (AMP) Monthly Chart 


Chart 38b – Henderson Group (HGG) Weekly Chart 


Chart 39 – Challenger Financial (CGF) Monthly Chart


Chart 40 – Suncorp Group (SUN) Monthly Chart


Chart 41 – Insurance Australia (IAG) Monthly Chart


Chart 42 – QBE Insurance (QBE) Monthly Chart


Chart 43 – Wesfarmers Ltd (WES) Weekly Chart


Chart 44 – Woolworths Ltd (WOW) Weekly Chart


Chart 45a – Seek Ltd (SEK) Monthly Chart


Chart 45b – REA Group Quarterly Chart


Chart 46 – Telstra Corp. (TLS) Monthly Chart



Chart 47 – Vocus Communications (VOC) Weekly Chart



Chart 48 – TPG Telecom (TPM) Monthly Chart


Chart 49 – Westfield Corp. (WFD) Monthly Chart


Chart 50– CSL Ltd (CSL) Monthly Chart


Chart 51 Ramsay Healthcare (RHC) Monthly Chart


Chart 52– Healthscope (HSO) Weekly Chart


Chart 53 - Ansell (ANN) Monthly Chart 


Chart 54 – Amcor Ltd (AMC) Monthly Chart


Chart 55 – Crown Resorts (CWN) Monthly Chart


Chart 56– Bellamys (BAL) Weekly Chart


Chart 57– JB Hi-Fi (JBH) Monthly Chart


Chart 58– Harvey Norman (HVN) Monthly Chart


Chart 59a– Australian Dollar (AUD) Monthly Chart

As most of us know the $A has struggled over recent years as markets factor in further potential rate cuts for Australia to fight the weakening economy, post the commodities boom. A large degree of the recent bounce from the 68c area has been courtesy of a weaker $US. The $US is 50-50 just here but a kick over 102 would complete a classic advance structure, perhaps fresh signals of Fed rate hikes ahead will fuel this advance.

We are eventually targeting the ~65c region BUT the short term relative strength looks likely to continue and frustrate the RBA - we are potentially targeting ~81c from this bounce.


Chart 59b– The $US Index Monthly Chart


Commodities

Gold has  rallied very well from multi-year lows last December but has reached our initial target area hence short term caution is warranted. If the $US strength resumes which feels a strong possibility then an ideal buying opportunity towards $US1200/oz area may present itself.

Copper remains in a negative downtrend on a longer term basis targeting prices over 20% lower.

Crude Oil still looks set to continue the recent strength towards the $US60/barrel resistance area after what currently looks like a completed pullback.

Iron Ore achieved our +$US70/tonne target, technically we are now neutral.

Chart 60 – Gold Monthly Chart


Chart 61 – Copper Monthly Chart


Chart 62 – Crude Oil Monthly Chart


Chart 63 – Iron Ore Monthly Chart




All figures contained from sources believed to be accurate.  Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy.  Prices as at 28/08/2016. 9:00PM.
 
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