Market Matters Report / Market Matters Weekend Report Sunday 2nd September 2018

By Market Matters 02 September 18

Market Matters Weekend Report Sunday 2nd September 2018

Market Matters Weekend Report Sunday 2nd September 2018

The ASX200 enjoyed a solid week rallying over 1% to end August with a +0.6% gain for the month, a solid performance considering the average return over the last 10-years is -0.1%. Also, a fair performance considering many large names including Commonwealth Bank (CBA) and Telstra (TSL) traded ex-dividend during the month. The banks and telco’s were the best performers last week rallying +2.6% & +4.2% respectively but the banks still closed in the red for the month following the recent Liberal parties ructions.

The $A had a pretty awful month falling almost -2.5c to ~71.90, its lowest level since early 2017, as we’ve covered in previous reports this decline continues to add support to the profitability of Australian companies with $US earnings - we remain bearish the “little Aussie battler” targeting ~65c and hold exposure to this view via the BetaShares $US ETF.

A volatile reporting season is now behind us and its provided some huge moves on the individual stock level while the ASX200 has spent 11-weeks basically rotating between 6200 and 6375. September has now arrived, over the last decade it’s the second weakest month of the year falling on average ~2%, if we use 20-years of data its actually the weakest month of year. However, one seasonal statistic is most definitely not a reason to alter investment portfolio’s but it is certainly worth being aware of.

  • While we continue to anticipate a pullback in stocks no major sell signals have been generated locally, or in the US, at this point in time.

US stocks recovered from earlier losses on Friday to go into their long 3-day weekend (Labor Day) basically unchanged, the SPI futures are pointing to a strong opening for the ASX200 on Monday, up around 1% with BHP trading +20c higher, primarily because of the weaker $A.

ASX200 Index Chart

Sentiment has changed dramatically throughout 2018 with the phrase “melt-up” being banded around last week and option volatility rising as investors chased upside protection through buying calls, the complete opposite to what we witnessed back in January / February.

The basic characteristic of a “melt up” is a market rallying harder and further than almost anyone imagines before often ending in tears, the “Tech Wreck” was a classic stock market example – see below chart.

However when I stand back and look at US equities, which are currently enjoying their longest bull market in history, it doesn’t feel like a “melt up” but more like a strong steady grind higher i.e. the US S&P500 is up 8.5% so far in 2018 or an average of +1.1% per month – never say never but that’s my 2 cents at this stage.


In the last year we witnessed another “melt up” and crash in Bitcoin / crypto currencies, the euphoria was amazing around last Christmas but the 60% correction must have hurt many “punters” – note I did not use the word investors.

Bitcoin ($US) Chart

1 Should Emerging Markets be given a wide berth?

The problems in Turkey are no longer looking like a spot fire as other emerging market countries including Argentina, Indonesia, South Africa and India experienced significant currency volatility last week. The further the $US rallies the more problems that countries who have large borrowings in $US will experience as repayments increase in their respective domestic currencies, it’s a simple but painful equation. Consider some of the below facts if you doubt that emerging markets are experiencing a tumultuous time:

  1. Last week Argentina raised interest rates to 60% (yes sixty) in an attempt to support their peso which hit a record low.
  2. The Indonesian Rupiah slid to its lowest level in 20-years.
  3. The Indian Rupee’s decline accelerated, with the currency reaching its lowest level in history.
  4. The MSCI currency index has now fallen for 5 consecutive months, the worst run since late 2015.

Donald Trump has made noises around devaluing the $US and perhaps he will become the “knight in shining armour” for the region because presently both the momentum and trend are pretty ugly.

MSCI Emerging Markets Currency Basket Index Chart

Back in January emerging markets (EEM) were one of fund managers favourite asset classes for 2018, this has clearly turned sour with the EEM equities index sitting ~17% below its January high, interestingly the same “experts” have now made a total about turn with EEM now becoming fund managers largest short position.

  • MM has tweaked its view on EEM and we like the IEM (iShares emerging markets ETF) at current levels but would also considering averaging into fresh 2018 lows.

From a technical perspective the long-term picture for the EEM is relatively neutral as we sit at the same levels which were reached in 2009 and have been tested almost every year since.

MSCI Emerging Markets Index Chart

It actually feels to us that US stocks have almost become a quasi-bond as they appear to be receiving a “safety bid” when any global macro-economic concerns raise their head. With both the $US rallying and US economy strong it’s understandable but potentially dangerous if investors are thinking “if in doubt buy US stocks, especially the tech space”.

The latest Bank of Americas fund manager’s survey also showed cash holdings remain at 4.7%, above the 10-year average of 4.5%, while fund managers increased their US equities position to 9% overweight the highest since February 2017.

However trade wars have led to huge outflows from the emerging markets to become marginally underweight after being greater than 40% overweight only 4 months ago!

  • The long US stocks short emerging markets elastic band is clearly tightening.

US S&P500 v emerging markets Index Chart

2 Is it time load up on resources?

Trade concerns remain the largest concern to fund managers and this has led to the decline in emerging markets discussed above plus an aggressive correction in our highly correlated resources sector e.g. over the last month Iluka (ILU) -20%, Fortescue Metals (FMG) -11.7%, Oz Minerals (OZL) -5.1% and RIO Tinto (RIO) -10.9%.

The sector is clearly facing headwinds at present as opposed to the tailwinds of the last few years but corrections often provide opportunity for the brave. The declines within the sector have not been without foundation as the underlying base metals plus, iron ore, have also experienced a very tough few months.

  • However if the trade war concerns are overblown the recovery in our resources sector is likely to be strong, making it a viable and more traditional alternative to buying the emerging markets.

MM basically exited the sector in Q1 of 2018 and with the exception of a few small jabs we remain on the sidelines looking for the correct time to re-enter.

Bloomberg Base Metals Index Chart

Today we’ve looked at 3 resource stocks we are considering for the MM Platinum Portfolio to join our small holdings in Newcrest (NCM), RIO Tinto (RIO) and Mineral Resources (MIN) – a combined 9% holding following the recent purchase of RIO.

RIO Tinto (RIO) has already corrected over 18% from its 2018 highs, its recent report was a touch messy but it’s now trading on an Est P/E for 2018 of only 10.7x while yielding 5.5% which is becoming increasingly attractive.

  • MM will consider averaging our RIO position below $70.

NB We remain keen on BHP under $30 but the relative corrections in both stocks in our opinion has RIO looking more attractive on a comparative basis i.e. -16.5% for RIO compared to -5.9% with BHP.

RIO Tinto (RIO) Chart

Nickel producer Western Areas has been smacked well over 30% from its dizzy heights back in April. The nickel price has corrected around 20% and the rest of damage was done by WSA itself failing to excite the market with its latest report.

  • MM likes WSA as an aggressive play, into fresh 2018 lows, around the $2.50 area.

Western Areas (WSA) Chart

Copper and gold producer Oz Minerals (OZL) has been on a rollercoaster ride in 2018, for one brief moment falling almost 21% in just a few months.

  • MM likes OZ Minerals (OZL) around the $8.80 area.

Oz Minerals (OZL) Chart

One concern we have with resources space, expect of course the underlying issues around a potential global trade war, is our own Australian Dollar ($A).

The correlation between the Metals & Mining stocks and the $A has decoupled in a pronounced manner over the last few months, implying either the $A bounces, or resource stocks have further to fall.

  • MM likes resource stocks into weakness but will not be chasing into any strength at this stage of the cycle.

Metals & Mining Producers ETF v Australian Dollar ($A) Chart

3 Interest rate should never be ignored.

Recently Jamie Dimon, regularly referred to as the world’s greatest banker, called the US 10-year bond yield up to 5%, a very bold call although the rumour is JP Morgan is holding a huge short bond position i.e. a bet that US bond yields continue to rise. The global problem is that while interest rates have been at extreme low levels following the GFC debt levels have doubled.

We already seeing issues raising their head domestically around the property market with Westpac raising home rates last week – around 30% of Australian banks funding comes from offshore hence even if the RBA keeps Australian rates down if overseas rates increase the creep higher in domestic mortgages will continue.

We probably all know by now that Australia has the second highest household debt to income on the planet, this is ok when asset prices are rising but it can become a major issue when they fall. Our opinion is that unemployment is the key to Australia, if it starts rising things could unravel very quickly hurting banks and many others on its way.

We cannot see the RBA increasing rates at least for a year and its probably enjoying the drift lower in the $A which is making our economy more competitive.

The big question remains where is the “uncle point” for stocks with regard to interest rates. It took about 12-months of interest rate hikes by the Fed from 2004-6 before the GFC hit, this is a typical scenario as there’s usually a lag after rates have been pushed up too far before stocks / assets unwind.  In the scheme of things rates have not yet risen that far albeit from a very low base.

US Fed Funds Rate Chart

Market players continue to watch US bond yields very closely, especially to see if they invert e.g. 2-year bond yields rally above their 10-year friends – the differential is now only 0.2335%.

  • Historically stocks will fall when / if the US yield curve inverts i.e. the move will probably become self-fulfilling because so many market players are conscious of it.

NB Only once in history has this cause-effect relationship not proved accurate.

The contraction of the bond yield differential implies to us that the US is heading towards a recession around 2020, hence our phrase that the global asset / equity bull market since the GFC is very mature still feels correct.

When we consider history one of the standout messages for this late stage of the cycle is be extremely careful paying up for growth i.e. We want GARP (growth at reasonable price) not GAAP (growth at any price).

We have witnessed some big pullbacks in the “hot” growth stocks over recent weeks e.g. Afterpay (APT) -25%, A2 Milk (A2M) -33%, Wisetech (WTC) -20% and NEXTDC (NXT) -18%. While a few of these have recovered extremely well it illustrates the increasing volatility / risks now entering the space – they have become a traders heaven!

US 2/ 10-year yield curve Chart


Again no major changes.

  • We are now neutral while the ASX200 can remain above 6290 plus are now neutral US stocks which have made fresh all-time highs as expected.
  • We are looking for opportunities in the under pressure emerging markets, or resources spaces.
  • We remain comfortable sellers of strength but not weakness, just yet. 

Standout technical chart (s) of the week

Fortescue (FMG) has been on a horror run since early 2017 tumbling over 47% while the resources sector has been strong.

Iron ore has turned down almost 7% over the last 4 weeks while FMG has fallen 14% as the stock continues to underperform its underlying bulk commodity.

The glass is very much half empty in FMG land with the stock trading on an Est P/E of 9.3x for 2019 while yielding 6% fully franked.

  • FMG is slowly but surely reminding us of TLS when it was falling month after month. We are watching for “aggressive style” opportunities.

Fortescue Metals (FMG) v Iron Ore Chart

Trading Opportunities on our radar

While we continue to like BHP targeting sub $30 as an optimum entry area but on a relative basis we now prefer RIO after its significant pullback and subsequent decoupling this financial year.

  • We believe the BHP – RIO spread will contract into Christmas.

BHP Billiton (BHP) v RIO Tinto (RIO) Chart

Investing on our radar

We’ve been monitoring CWY for a few weeks, it’s a stock and sector we like but the price has not been too exciting.

CWY is trading on an Est P/E for 2019 of 29.6x while yielding 1.1% fully franked.

  • We like Cleanaway Waste (CWY), initially under $1.80.

Cleanaway Waste (CWY) Chart

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


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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