18 August 19
Market Matters Weekend Report Sunday 18th August 2019
18 August 19
Market Matters Weekend Report Sunday 18th August 2019
16 August 19
Phew - a big week comes to a close (TLS, OML, COH, NCM, SGR, HLS)
16 August 19
5 stocks we are considering into the current market panic & a word on recent performance (BIN, ALL, MQG, OZL, APX)
15 August 19
Not a good day to miss earnings expectations – market falls 2.85% (TLS, BKL, TWE, SUL, WPL, WHC, ORA, CWY)
15 August 19
Should we buy more gold stocks as volatility increases? - (CSL, EVN, GDX, MFG, NCM, NST, PGH, RSG, SAR)
14 August 19
A mixed day on the reporting front (PGH, CSL, NAB, TAH)
14 August 19
Income Report: Are we finding income opportunities amongst Hybrids? (NAB, TAH)
14 August 19
Overseas Wednesday – International Equities & ETF Portfolios (MFG, COH, CYB, BABA US, 700 HK, 2318 HK, SH US, TYU9, GOVT US)
13 August 19
Magellan to raise capital for future growth after reporting strong result (MFG, CGF)
13 August 19
Keep your fingers on the pulse, there’s lots going on (JBH)
The ASX200 had a very poor week falling almost 3% as $50bn was wiped off the local market, we witnessed an aggressive unwind of the previously top performing high growth / valuation stocks – some of the stocks included in the relatively long list of causalities were : Seek (SEK) -5%, Aristocrat (ALL) -6.3%, Macquarie Bank (MQG) -5.2%, Treasury Wines (TWE) -5.2%, A2 Milk (A2M) -8%, CSL Ltd (CSL) -7.3%, and After Pay (APT) -17.2%. At MM we’ve been forecasting this market repositioning for a few weeks and hence our portfolios were largely left unscathed as investors scrambled to take some money off the table from stocks that have soared over the last 1-2 years.
As we saw last week the more traditional “blue chip” stocks can largely hold together while this correction unfolds because they have not enjoyed the strong gains of the last year but the index itself can still come under major pressure. Our current view is the current unwind will continue in its aggressive manner until we see calm return to emerging markets (EM) and worries around a US - China trade war diminish. On Friday night Donald Trump signalled, as Bloomberg so perfectly expressed it, is prepared to go “all in against China” after threatening an additional $US267bn in tariffs, only on Thursday people were hoping he may back off from his previous $200bn in tariffs – it took the Presidents latest rhetoric to take US stocks to their first weekly decline in a month.
The escalation of the US – China trade tensions continues to hurt the emerging markets as the $US and to a certain extent US stocks remain the standout perceived safe havens. Both the Australian dollar and equities are coming under pressure as they are suffering for a collection of reasons including trade dependency with China, internal issues with household debt / property prices plus we are generally considered a higher risk country, hence association by default with the emerging markets when things are tough.
Donald Trumps latest actions have the ring of potential capitulation about them, assuming over the weekend he doesn’t Twitter any retraction / softening of his stance a crescendo of selling pressure on stocks should definitely be considered as a realistic scenario for the next few weeks – I cannot see how this latest outburst, this time from Airforce One, can have anything but a damaging impact on stocks.
The most important question as this unwind evolves is “what do we believe will happen next and how can we make money from any potential moves utilising the most prudent risk / reward?”. Since the major swing low at 4706 in 2016 the ASX200 has corrected 10% in 2016 plus 6.9% already earlier this year, our preferred scenario is the market is in the midst of a ~8% correction which should test the 5750-5850 major support.
US stocks closed down -0.2% on Friday following President Trumps comments while ignoring strong local employment data in the process. The SPI futures are calling the ASX200 to open down around 25-points but it will be interesting to see how Trumps latest trade threats impacts investors after a weekend to ponder their potential implications – a very real and damaging trade war may actually unfolding before our eyes.
ASX200 Index Chart
The trend is certainly your friend with the Australian Dollar as it fell to 30-month lows on Friday night with a number of economic factors leaning on the local currency even though contagion with EM is not in the frame we are following their currencies lower:
We feel that the long $US v $A has become a “crowded trade” and when you consider all of the above its easy to question why anybody would currently consider buying the $A but that’s the extreme style of sentiment that exists at market tops / bottoms. Hence if we see an aggressive spike lower in the $A over the next few weeks we may take profit on our long $US ETF position to focus on stocks but not while it continues to decline in an orderly fashion.
The Australian Dollar Chart
The US & Australian 10-year bond yields Chart
1 International equities
While global stock markets have been moving in a number of different directions the underlying theme has been the US outperforms everybody else. Donald Trump is clearly picking a fight(s) via trade wars while the US economy is booming, a bit like the school bully who just grew 6-inches faster than his classmates.
The below indices show the relative performance so far for September & 2018, we’ve not even considered EM which has been smacked:
We feel there exists a strong possibility that US stocks are set to play catch up with global equities over the coming weeks, we particularly like the set-up of the Russell 2000 which looks poised to correct almost 6% from last weeks close.
Similarly the FTSE, which we have been negative for a few months, still has another 4-5% downside before reaching our ideal retracement area.
The pieces of at least one potential puzzle are coming together, remember earlier our ideal target for the ASX200 being ~5800, another 5-6% lower.
US Russell 2000 Chart
UK FTSE Chart
I know a few subscribers will question what’s happened to the +20% correction that we’ve been “calling” for most of 2018, often referring to it as looming on the “horizon for this bull market”. The answer is simple if a touch boring:
In the current market our preferred scenario is another ~6% lower before markets regain their “mojo”, we have a number of reasons for this tweak to our medium-term view with one of them being we know too many people sitting on cash hoping to buy stocks cheaper!
As we mentioned earlier we like the chart of the Russell 2000 (RTY) primarily because we believe it offers excellent risk / reward.
MSCI Emerging Markets Index Chart
Recently we have been looking for the strong relative outperformance of US stocks v emerging markets to end, this view has clearly been premature so far. Following President Trumps salvo on Friday around trade with China it appears more water needs to go under this bridge before the significant divergence starts to regress.
US S&P500 v emerging markets Index Chart
2 Some resource stocks are looking very weak
Two stocks caught our eye for all the wrong reason when we scoured the market looking for risk / reward and of course ideas.
These targets may feel pretty dire but both stocks are already down 20% and 40% respectively from their highs of 2018 illustrating the volatility they can exhibit at times – at MM we always regard the resources sector as aggressive investments / trades simply because the companies cannot control the underlying commodity prices that determine their profitability.
Like with the high valuation / growth stocks we believe investors have been caught complacently long resource stocks in 2018 to painful effect - it also shows that in all likelihood many of the growth stocks can fall further.
If a US – China trade war gathers momentum next week the resources are certainly one of the sectors that are likely to suffer but if they do fall too far some excellent aggressive opportunities are likely to materilise.
OZ Minerals (OZL) Chart
Western Areas (WSA) Chart
One concern we raised last week with the resources space was with the Australian Dollar ($A), the issues remain very relevant as the $A continued its decline last week.
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 – remember we are net bearish the $A.
Metals & Mining Producers ETF v Australian Dollar ($A) Chart
One parts of the resources space which has unceremoniously fallen from grace is the lithium stocks as concerns escalate around oversupply. The declines from their respective 2018 highs have been huge:
However on Friday the sector enjoyed an aggressive bounce, albeit from a very low base, with no apparent news – the kind of move we like at MM.
Both GXY 18.3% and ORE 15.8% remain in the 4 heaviest most shortest stocks on the market but considering how far they have fallen perhaps we saw some short covering on Friday.
Orocobre (ORE) Chart
3 Checking in on the US “yield curve”.
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 0.2363%.
NB Only once in history has this relationship failed to accurately predict a recession.
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.
This correlation has been pushed from the front pages of the financial press but we have no doubt it will return when the US & China finally resolve their trade issues.
US 2/ 10-year yield curve Chart
Standout technical chart (s) of the week
The Chinese market is having an awful year falling -18% to-date with much of the losses blamed on the risks of a US China trade war.
The Chinese Index should be watched carefully for “buy signals” because it may be the precursor for a US-China resolution.
Chinas Shanghai Composite Index Chart
Trading Opportunities on our radar
Similar to ORE mentioned above we like Kidman Resources (KDR) for a solid short-term 15-20% bounce.
Kidman Resources (KDR) Chart
Investing on our radar
We’ve been monitoring ALL for a few weeks and were very close to pulling the trigger on Friday morning when the stock briefly tumbled under $29. The decent 2% bounce over the course of Friday we feel adds credibility to our target buy area.
ALL is trading on an Est P/E for 2018 of 24.6x while yielding 1.3% fully franked.
Aristocrat Leisure (ALL) Chart
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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