Market Matters Report / Market Matters Weekend Report - Sunday 26th July 2020

By Market Matters 26 July 20

Market Matters Weekend Report - Sunday 26th July 2020

Market Matters Weekend Report - Sunday 26th July 2020

The ASX200 continues to be glued to the psychological 6000 area, on a couple of occasions we thought it was poised to breakout above 6200 but the magnetic pull proved just too strong.  Under the hood the stock / sector rotation has also become fairly muted with no standout themes. Considering the banks, large cap miners and CSL all closed lower last week it was an ok performance by the ASX200 to close down only 10-points. We do feel the growth IT sector is slowly losing upside momentum however with over half of the sector closing positive last week its certainly not curtains yet. Last week saw OZ Minerals (OZL) rally almost 10% while Evolution (EVN) bucked the bullish gold influence falling over 4% after the companies update, happily this illustrates the market is still focused on corporate fundamentals.

Unfortunately, the standout news and topic of conversation has continued to be the coronavirus but the arrival of the local reporting season which fully kicks into gear in August might take investors back to basics. The day to day market sentiment is still likely to be dominated by the number of fresh virus cases announced every morning but on the stock level it’s going to be all about earnings and a  company’s outlook, this will take more interpretation than usual as we all try and second guess the influence of  COVID-19 moving forward. Next week sees Rio Tinto (RIO) on Wednesday and Fortescue (FMG) on Thursday face the music hence the resources are likely to be active, the question many will look to answer is have iron ore stocks become too optimistic?

While the Australian news is focusing on the number of new cases in Victoria and NSW it’s the numbers spiralling out of control in the US which still creates the most concern for MM. The calls are intensifying for the country to go back into lockdown as 60,000 new cases every day has become the norm – the very sobering big numbers are over 4 million cases with more than 140,000 deaths. These statistics continue to weigh on Donald Trump’s election chances in November, the bookmakers now have him as an almost “rank outsider” considering it’s a 2 horse race. We believe both a prolonged global economic slowdown due to the virus and worsening US-China tensions are largely built into stock prices but it’s hard to see further meaningful upside until the news improves.

MM is now neutral equities short-term.

Confirmed US cases of COVID-19 Chart

The local ASX200 has now been unchanged for a prolonged 7-weeks, we’ve been advocating “sell strength and buy weakness” since the start of June but I didn’t expect it would work so perfectly! Markets always return to their points of balance and on reflection the recent inactivity is simply offsetting the massive volatility around March time. Our preferred scenario is the local index will push higher in the coming months, where MM is likely to move slightly down the risk curve,  but our inability to follow Europe and the US to fresh 5-month highs early last week has diminished slightly my bullish stance short-term.

MM remains Australian bullish stocks medium-term.

ASX200 Index Chart

As mentioned earlier both Europe and US  indices made fresh 5-month highs early last week while our ASX failed to scale the same milestone reducing our confidence in stocks over the short-term but importantly we do believe both indices will make fresh all-time highs in the months ahead i.e. selling needs careful consideration / planning as many investors have already missed out on the last 20-30% upside, that’s painful if they also endured much of March’s pain.

MM remains medium-term bullish global stocks.

US S&P500 v German Dax Indices Chart

However, when we look at the US tech NASDAQ Index, which has regularly led equities over recent years, it closed well off its lows on Friday night - an excellent technical buy signal with the bull trend confirmed on a move  only 1% higher. Hence the risk / reward actually favours buying next week for the short-term traders. As for investors like ourselves we have no interest in selling current weakness but fresh highs ~8% might prove to be a slightly different story.

US NASDAQ Index Chart

While equities and  bonds have been fairly quiet through July its been a very different story in FX land,  on Friday night the $US dollar broke down to levels not seen since October 2018 – as we keep saying at MM, we believe the tailwind of $US revenue for Australian companies over the last decade is rapidly   swinging to a headwind – our initial target is the 80c area, or ~12% higher.

MM remains both bullish the $A and bearish the $US.

Australian Dollar ($A) Chart

Historically there’s a very pronounced inverse correlation between the $US and commodities i.e. if the Greenback falls commodity prices rally. The chart below illustrates this over the medium / long-term, it also shows us that there are many non-believers that the $US has experienced a major trend  change, if we are correct commodities should be poised for a period of aggressive catch-up, the correlation with the $A implies they are ~10% under-priced.

The major reason the value of the $US influences commodities prices is simply the dollar is the benchmark pricing currency for most commodities i.e.  the $US remains the reserve currency of the world. Hence when the value of the dollar drops, it costs more dollars to buy commodities. At the same time, it costs less in other currencies when the dollar is in decline. Hence to Australian stocks what matters the most is the combination of how any individual commodity is moving in $A terms plus if / where a business has hedged their respective exposure.

MM remains bullish commodities and resource stocks.

Bloomberg CRB Index Chart

The precious metal complex, and especially gold & silver, are 2 commodities MM has been regularly discussing of late as we look for an ideal risk / reward entry opportunity. When we consider gold in $A terms we can see it recently corrected ~10% but the appetite for the local gold sector, in the current “free money” environment, has been unrelenting and pullbacks have remained shallow. It feels like we will have to just bite  the bullet and at least “pay up” for part of our planned exposure as gold looks set to continue its multi-year advance – our sector preference remains Newcrest Mining (NCM).

MM remains bullish precious metals.

Gold in $A/oz Chart

Evaluating 5 of last week’s big movers.

With the majority of markets going through a period of stagnation we felt the best way to add some value to subscribers in this Weekend Report was to briefly evaluate 5 of the advancers from last week to see if they are threatening significant changes in trend – we’ve deliberately focused on stocks we own / are considering buying as our P&L is obviously the primary concern.

1 NRW Holdings (NWH) $1.80

Last week mining services stock NWH rallied almost 10%, theres no real change from our comments last week except to add we felt it was a very solid performance to only give back a few cents on Friday as the market tumbled 70-points – NRW is generally a high beta stock.  MM is holding in our Growth portfolio, there was no obvious news to attract last week’s buying, its recent ~25% decline probably just brought the value investors out of their burrows as the resources related business looks very cheap to MM, especially if we’re correct and a reflationary cycle is around the corner.

MM remains bullish NWH initially looking for ~30% upside.

NRW Holdings (NWH) Chart

2 Tabcorp (TAH) $3.64

Last week gambling stock TAH rallied 9% after the businesses announced plans for a new CEO. We like TAH for a push towards $4 but the risk / reward is not compelling at current levels especially as the growing ethical fund players will be giving the stock a wide berth.

MM likes TAH initially targeting a test of $4.

Tabcorp (TAH) Chart

3 QBE Insurance (QBE) $10.40

Last week serial underperformer QBE rallied 11% as the board updated forecasts for FY20. At MM we are not a fan of the stock and we feel it just made up a little lost ground after being a huge laggard after the company’s announcement wasn’t too bad.

MM is neutral QBE.

QBE Insurance (QBE) Chart

4 OZ Minerals (OZL) $13.78

Last week OZL surged over 9%, a pleasing move for MM as we own the stock in our Growth Portfolio. The rally and company performance are coming as no surprise to ourselves and we’re actually enjoying reading a few brokers saying it’s a sell at current levels. A period of consolidation would not surprise us but overall, we remain very bullish the stock and sector, hence we see no reason to disembark the train at this stage.

MM remains bullish OZL and the Resources Sector.

OZ Minerals (OZL) Chart

5 AP Eagers (APE) $7.23 

Last week auto retailer APE rallied almost 17% after a bullish research note from influential broker UBS who have a price target of $8. We agree  with UBS and believe last week’s strength is likely to follow through with an initial test of $8 likely but to appreciate further general retail conditions are probably needed to improve  i.e. a vaccine or successful containment of  COVID-19 in NSW and Victoria.

MM is bullish APE with an initial target of over 10% upside.

AP Eagers (APE) Chart

Conclusion

We remain bullish NWH and OZL both of which reside in our Growth Portfolio.

Also TAH and APE look poised to rally at least 10% with the later our preference, conversely we have no interest in QBE.

Our Holdings

Our positions as of Friday. All past activity can also be viewed on the website through this link.

Weekend Chart Pack

The weekend report includes a vast number of charts covering both domestic and international markets, including stock, indices, interest rates, currencies, sectors and more. This is the engine room of our weekend analysis. We encourage subscribers to utilise this resource which is available by clicking below.

 





Have a great day!

James & the Market Matters Team

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

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