Market Matters Report / Market Matters Weekend Report Sunday 9th February 2020

By Market Matters 08 February 20

Market Matters Weekend Report Sunday 9th February 2020

Market Matters Weekend Report Sunday 9th February 2020

Last week both the ASX200 and global markets put in a stellar performance to shrug off concerns around the coronavirus and importantly its potential impact on global growth. After gapping sharply lower on Monday morning we saw the local index rally to close marginally higher while US stocks surged ~3% to make fresh all-time highs. Under the hood things were fairly evenly balanced with losers actually just nudging winners, the Energy Sector was again clearly worst on ground while IT, Retail, Healthcare and Food Sectors were the backbone of the small appreciation.

Personally I feel that things are becoming a touch too optimistic when we consider the escalation in both deaths and cases over just 1-week, if a vaccine isn’t developed soon Australia’s largest trading partner might be turning out the lights for a far longer period than many have even contemplated. However last weeks rally by ris+k assets illustrates that the post GFC longest bull market in history remains in tact with investors still in “buy the dip” mode. The acceleration of the virus shown below is very sobering and the thought of where we could be in one months’ time is positively alarming:

1 - “25-days after being discovered, we have 9935 people reported as infected and 213 fatalities, unfortunately these numbers are clearly rising rapidly”  - last Saturday morning I typed this for our Weekend Report.

2 – One week later over 630 people have died while more than 31,500 are reported to be infected, its easy to now describe this as a mild pandemic especially when we consider its still appears to be gaining momentum – the numbers have basically tripled over the week, lets hope China’s efforts of containment start to temper the outbreak.

So far things have unfolded pretty much as we’ve anticipated for both the virus outbreak and markets hence we intend to follow our plans which is likely to see MM remain relatively active over the weeks ahead. Financial markets remain focused on the impact of a China shutdown has on markets / equities e.g.  China is the world’s largest importer of oil and its consumption has already fallen 20% significantly dragging down oil stocks in the process. Conversely stocks that benefit from both a lower $A and bond yields are enjoying the renewed effect from those two tailwinds.

The short-term slowdown in China remains very real with an almost incomprehensible 56 million people now living in a state of lockdown and with a vaccine likely to be months away its extremely hard not to imagine global growth tumbling over the next 6-monthgs but, and it’s a huge but, central banks led by China’s PBOC last weekend are likely to press the stimulus buttons again to ward off any risk of a recession making investing in 2020 a both tricky and  fascinating endeavour – a choppy year ahead remains our view.

MM remains keen to reduce our market exposure around 7200 for the ASX200.

On Friday night the US Dow Jones was sold off 277-points but the SPI futures are pointing to a small gain on Monday morning, even with BHP sinking 50c  in the US in line with weaker commodity prices. We believe the outperformance by the SPI futures, on very big volume, comes down to 2  major factors:

1 – The ASX200 already fell -0.38% on Friday in anticipation / concern of another poor Friday session on Wall Street.

2 – The $A sunk to its lowest level in over decade on concerns of  China slowdown and the ASX200 has been inversely correlated to the local currency for more than a year.

ASX200 Index Chart

The chart below illustrates the clear inverse correlation between the ASX200 and the $A since the start of 2019 with the relationship becoming more noticeably pronounced in 2020  i.e. the ASX200 has revelled in periods of weakness for the $A.

ASX200 Index v Australian $A Chart

Global Indices

US stocks soared to fresh all-time highs in the face of adversity last week with both the S&P500 and NASDAQ making fresh all-time highs led by heavyweight names like Microsoft (MSFT) and Amazon (AMZN US). Our preferred scenario is US stocks are approaching a period of consolidation similar  to that in August / September 2019, not a big call considering the markets impressive gains over the last 6-months.

MM anticipates some consolidation by the NASDAQ between 8800 and 9600.

US NASDAQ Index Chart

The old market adage “The trends your friend” has been very on point since equities endured their relatively savage correction in Q4 of 2018 but not just in terms of price, its arguably been more pronounced in terms of stock /  sector performance. In today’s low interest rate environment investors / fund managers have continued to drive up the price  /  valuations of the in favour stocks like CSL (CSL), Xero (XRO) & Woolworths (WOW) locally and Microsoft (MSFT  US) and Apple (AAPL US) in America. Like most trends this will eventually get too extended because everything has a fair value, even CSL, and when markets revert it often unfolds like a fast and painful game of musical chairs, similar to late 2018.

We are not “calling”  a top in Apple, the worlds largest stock, but a period of consolidation between $US300 and $US350 we believe is strong possibility which leads us to 2 clues  on where equities are headed short-term:

1 – Apple is now a buy into weakness, now not an ideal time to chase strength.

2 – US stocks remain likely to extend their current rally to fresh all-time highs.

US Apple Inc (AAPL US) Chart

At MM we watch European Indices for clues to “what comes next” for local stocks as the ASX is far more correlated to the region  than the US, although most people still focus on the Dow /  S&P500. Currently the German DAX is painting a very similar picture to the ASX200 and Apple i.e. up a few % before another decent correction.

MM is technically medium-term bearish the German DAX if it breaks above 14,000.

German DAX Index Chart

Bond Yields & inflation remain intriguing into 2020/21.

The picture from the bond market continues to coincide nicely with our preferred technical and fundamental scenario for 2020:

1 – US and domestic bond yields look perfectly positioned to break lower which implies a flight to the safety of bonds, probably a case of short-term sell stocks and buy bonds. However the Australian 3-year bond yields look less likely to hit fresh all-time lows as the RBA slowly but surely flags a less dovish stance, we believe the  RBA  is not keen to cut interest rates in 2020.

2 – MM continues to look to fade this move if it unfolds as we’ve been outlining for many weeks i.e. sell bonds into a break to multi-year lows on yields.

US Generic 30-year Bond Yield Chart

Metals & Resources fall with China

The investment world all knows global growth is going to hiccup at best due to the coronavirus but nobody truly knows how bad things will escalate plus of course how aggressively central banks will act to regain some degree of status quo. Copper and crude oil have been crunched 15% and 25% respectively, declines which makes perfect sense considering the China situation, these sharp falls led to MM buying BHP Group (BHP) and OZ Minerals (OZL) last Monday into panic selling. However the lacklustre recovery by the sector, commodities and of course worsening news from China has us leaning towards the below 2 thoughts:

1 – We went a little too early and the Australian resources might dip lower in the coming weeks.

2 – MM remains bullish inflation and commodities in the year (s) ahead hence we remain comfortable buying further weakness in the sector.

Copper Futures ($US/lb) Chart

Crude Oil Chart

1 –  The MM Growth Portfolio

Last week MM went aggressively long equities in our Growth Portfolio through increasing our positions in BHP Group (BHP), Boral (BLD) and OZ Minerals (OZL) while reducing our cash holding to 1.04% in the process -

MM is now targeting the 7150-7200 area for the ASX200 to reduce its market exposure i.e. increase cash levels to regain some flexibility. We have a few stocks / positions in our sights to achieve this goal but their performance in the coming weeks will determine where we decide to act:

Selling : Bingo (BIN), Computershare (CPU), Commonwealth Bank (CBA), Newcrest Mining (NCM) and Evolution Mining (EVN).

Buying : A2 Milk (A2M, BetaShares Bearish ETF (BBOZ),

Obviously this list might evolve further over what’s a volatile period for stocks but considering how we see markets at present its unlikely to deviate greatly.

Watch for alerts.

BetaShares Australia Equities Bearish ETF (BBOZ) Chart

2 MM Income Portfolio

Last week we reduced our MCP Master Income Trust (MXT) by 2.5% to 5%, taking our overall cash position in our Income Portfolio to 4.5%:

Bond yields remain an important focal point of how we structure our Income Portfolio and as discussed earlier we believe they are about to make fresh all-time lows, certainly a tailwind for an income generating portfolio. However at MM we believe the move lower in yields might be become a final spike in the multi-year bear market for rates hence MM will continue to evaluate switching from 1 or 2 of our more traditional yield play positions to say another high yielding bank / resource stock who should benefit operationally from increasing yields / or a pick-up in global growth.

We are likely to cut the CBAPF to increase our allocation to equities as outlined in Wednesdays Income Report :

Selling the CBAPF into strength and buying a high yielding stock into current weakness will be tempting e.g. Fortescue Metals (FMG) below $10.50 while Smart Group (SIQ) is still on the radar.

Fortescue Metals (FMG) Chart

3 –  MM International Equites Portfolio

Early last week MM pressed the buy button into weakness buying Visa (V US), and adding to Tencent (700 HK) and Ping Insurance(2318 HK) taking our cash position down to 21% :

We believe the markets set for a period of choppy rotation hence we now have an evolved  list of stocks to both sell into strength and buy into weakness::

Buy – Google (GOOGL US), LVMH Moet Hennessy (MC FP) and  Microsoft (MSFT US) .

Sell – Alibaba (BABA US), Wells Fargo (WFC US) and Barrick Gold (GOLD US).

MM is looking for NYSE Composite Index to rotate between 13,500 and 14,500 over the coming months.

NYSE Composite Index Chart

4 - MM Global Macro ETF Portfolio

Last week MM added to our Global Copper Miners ETF (COPX US), iShares MSCI Emerging Markets ETF (IEM US) and BetaShares Global Banks ETF (BNKS) taking our cash position down to 41.5% :

BetaShares Global Bank ETF (BNKS) Chart

We continue to feel things are slowly aligning with our macro views hence we expect to be busy in the weeks / months ahead:

Buy – ProShares Short 20+ US Treasury ETF (TBF US) and the Invesco DB Agricultural ETF (DBA US).

Sell - iShares MSCI Silver ETF (SLVP US) and Van Eck Gold Miners ETF (GDX US)  -  a total of 12.5%.

ProShares Short 20+year US Treasury ETF (TBF US) Chart

No change, MM remains very keen on the Agricultural Index which from an investors risk / reward angle its looking exciting following its more than 50% plunge over the last 8-years. We are initially looking for a 25% rally which should have major knock on effect on food related stocks and of course inflation. Our preferred  vehicle of choice is the Betashares (FOOD AU) ETF:

MM is bullish the Agricultural Index which should eventually increase both inflation and bond yields.

NB The BBG Agricultural Index includes the likes of coffee, corn, soybeans, cotton, sugar and wheat. 

BBG Agricultural Index Chart

Chart of the week.

Coronavirus might have sent a wave of selling through the Australian Materials Sector but one noticeable strong performer last week, after a horror opening on Monday, was Sims Metal (SGM), we remain long and bullish.

Technically MM is bullish SGM initially targeting ~$13.

Sims Metal (SGM) Chart

Investment of the week.

Last week we wrote:

“A number of subscribers have asked us where we feel is an ideal place to average nickel miner Western Areas (WSA),  well the answer has always been around $2.50 and that opportunity looks likely on Monday, fingers crossed support holds and the coronavirus panic slowly disappears.”

So far so good, WSA spiked to $2.46 and enjoyed a small bounce. Time will tell if our risk /  reward buy level proves correct but patience certainly has paid off on the buy side.

MM remains bullish WSA around $2.50.

Western Areas (WSA) Chart

Trade of the week.

The global Oil Sector has been sold off aggressively on the coronavirus outbreak, in the US it fell another 0.75% on Friday. We believe it’s almost time to be brave and catch the proverbial falling knife, we particularly like Santos (STO) between $8 and  $8.10.

MM is bullish STO into weakness around $8.

Santos (STO) 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.


All figures contained from sources believed to be accurate.  All prices stated are based on the last close price at the time of writing unless otherwise noted. Market Matters does not make any representation of warranty as to the accuracy of the figures or prices and disclaims any liability resulting from any inaccuracy.

Reports and other documents published on this website and email (‘Reports’) are authored by Market Matters and the reports represent the views of Market Matters. The Market Matters Report is based on technical analysis of companies, commodities and the market in general. Technical analysis focuses on interpreting charts and other data to determine what the market sentiment about a particular financial product is, or will be. Unlike fundamental analysis, it does not involve a detailed review of the company’s financial position.

The Reports contain general, as opposed to personal, advice. That means they are prepared for multiple distributions without consideration of your investment objectives, financial situation and needs (‘Personal Circumstances’). Accordingly, any advice given is not a recommendation that a particular course of action is suitable for you and the advice is therefore not to be acted on as investment advice. You must assess whether or not any advice is appropriate for your Personal Circumstances before making any investment decisions. You can either make this assessment yourself, or if you require a personal recommendation, you can seek the assistance of a financial advisor.  Market Matters or its author(s) accepts no responsibility for any losses or damages resulting from decisions made from or because of information within this publication. Investing and trading in financial products are always risky, so you should do your own research before buying or selling a financial product.

The Reports are published by Market Matters in good faith based on the facts known to it at the time of their preparation and do not purport to contain all relevant information with respect to the financial products to which they relate. Although the Reports are based on information obtained from sources believed to be reliable, Market Matters does not make any representation or warranty that they are accurate, complete or up to date and Market Matters accepts no obligation to correct or update the information or opinions in the Reports. Market Matters may publish content sourced from external content providers.

If you rely on a Report, you do so at your own risk. Past performance is not an indication of future performance. Any projections are estimates only and may not be realised in the future. Except to the extent that liability under any law cannot be excluded, Market Matters disclaims liability for all loss or damage arising as a result of any opinion, advice, recommendation, representation or information expressly or impliedly published in or in relation to this report notwithstanding any error or omission including negligence.