Morning Report / Overseas Wednesday – International Equities & ETF Portfolios (CGC, AAPL US, FB US, BABA US, SLVP US)

By Market Matters 04 September 19

Overseas Wednesday – International Equities & ETF Portfolios (CGC, AAPL US, FB US, BABA US, SLVP US)

Market Matters Morning Report 4th September 2019

The ASX200 whipsawed around yesterday with little net direction as it appeared  to try and second guess how US  stocks would trade after the Labor Day long weekend. Even by 9pm AEST the US S&P:500 futures had traded in a significant 37-points /  1.3% range as US – China trade concerns escalate and Boris Johnson muscles BREXIT towards a conclusion, albeit a potentially messy finale. Around the same time as markets commenced trading in Europe on Tuesday the Pound was hammered below GBP1.20, to  its lowest level in over 3-years, as Boris Johnson appeared to lose his slim government majority – what a mess, let’s hope that the US and China can ultimately be more efficient.

As the Northern hemisphere faces mounting headwinds for risk assets Australia enjoyed some much needed positive economic data yesterday as the June quarter produced the countries first current account surplus in almost 45-years – when Margaret Thatcher was voted  the first female to lead the UK’s Conservative party and Disco was in vogue. The current account surplus reached  $5.8bn compared to an anticipated $1.5bn – as we often quote “the economists would have been correct but…...”. Following China’s strong data earlier in the week perhaps the region is holding up better than many fear.

Unfortunately it’s not all good news  for stocks because there was nothing in this data, or the RBA’s latest statement, to suggest another rate cut (s) is a forgone conclusion for Australia – markets are still expecting a rate cut on Melbourne Cup Day with a 60% probability priced in for next month, at MM we cannot see any reason for a cut in October. We stick with our thought in the PM Report: the RBA is ready to cut if needed but they might move slower than some think /  hope. 

Our thoughts are another cut to 0.75% in November could easily be the last change for long time as the RBA looks to avoid any knee jerk reaction, especially as there’s a distinct lag with the impact of rate cuts on the economy e.g. we’ve only just seen the Cash Rate fall from 1.5% to 1% and property prices are steadily improving but policy makers would be keen to avoid further risks of a bubble in this critical area for the domestic economy, and at this stage it’s hard to gauge how far this recovery will go.

MM currently remains comfortable to adopt a more defensive stance than during the first 6-months of 2019.

Overnight US stocks closed lower with the Dow down almost 300-points following noticeably weak manufacturing data and ongoing concerns around trade, the SPI futures are calling the ASX200 to open down 40-points. Our “Gut Feeling” is the local market is vulnerable at current levels to a ~6% decline where we would “love to go shopping”.

In today’s report we are going to look at our Platinum, International and ETF Portfolio’s, the Income portfolio will be covered in the income report later today.

ASX200 Chart

As I mentioned earlier,  the British Pound tumbled yesterday evening taking its decline since April 2018 to ~16% but by the sessions close it actually closed marginally higher. There’s a significant amount of bad news built into the price of the Pound and a sharp recovery would not surprise us as a BREXIT conclusion finally feels imminent – stocks like CYBG (CYB) and Janus Henderson (JHG) with UK exposure would probably enjoy such a bounce.

British Pound Chart

Yesterday’s economic data and  statement by the RBA had little impact on Australian bond yields as they still expect a rate cut in November plus another in 2020, halving the current Cash Rate from 1% to 0.5%.

Our feeling is another sharp sell-off by equities is required to drive the local 3-year bonds below 0.6%, currently our preferred  scenario at MM.

Australian 3-year Bond  yields Chart

Lastly the Aussie dollar which continues to take most data and economic news in its stride, yesterday’s numbers /  statement hardly registered with the “little Aussie  battler”. We are still looking for a major low in the $A but a poor period for stocks is often accompanied by a flight to the  $US which may give a final spike down in the  $A – watch this space.

Australian Dollar Chart

Platinum Portfolio

Yesterday MM sold 3 stocks from its MM Platinum Portfolio – Adelaide Brighton (ABC), Bank of Queensland  (BOQ) and  Orocobre  (ORE). We now hold a significant 29% cash position. To become significantly more  defensive / cashed up we will want an excellent opportunity from a risk / reward perspective or situation where one of our stocks presents a really compelling selling opportunity.

1 Costa Group (CGC) $3.37

MM has discussed reducing our Costa Group (CGC) position but at this stage the stocks looking good and a rally towards $4 would not surprise hence with our cash position already sitting at 29% we will be fussy with this selling.

MM is considering trimming our CGC position down from 6% to 3-4%.

Costa Group (CGC) Chart

2 Defensive to Cyclical

We think the time to rotate from defensive stock to cyclicals may actually be in late 2019 hence we are likely to avoid the Real Estate and Utilities when we increase our market exposure in favour of  stocks more exposed to an economic improvement like the Materials sector. However if we are correct and stocks are poised for another decent leg down then the elastic band between the defensives and cyclicals has further to stretch,  a panic sell off in cyclicals would be very tempting for MM in the weeks / months ahead.

MM is watching the embattled cyclical stocks for signs of a turnaround.

International Equites Portfolio

The US S&P500 is sitting 4% below its all-time high as geopolitical issues continue to increase day to day volatility, for those with flexibility and a plan exciting times. At MM we still expect further choppy action before another leg to the downside sometime in the weeks ahead, a news induced pop above 2950 would be ideal as it would probably stop out all the “weak shorts” making it easier to decline – remember markets do like to move in the path of most pain. However we continue it’s a matter of when, not if, stocks take another leg to the downside.

MM still  believes the risk / reward for US stocks is on the downside for the next few months.

Our preferred scenario is the S&P500 will shortly test the 2750 area in 2019, or another 5% lower.

US S&P500 Index Chart

Hence with MM still holding 75% in cash plus 2 market hedges via 5% a negative exposure to US stocks through a bearish S&P500 ETF (SH US) and 5% in Barrick Gold (GOLD US) our position fits our view leading to an inactive periods for this relatively new portfolio:

While we continue to anticipate pressing the “Buy button”  around the 2750 area basis the S&P500 what comes next is more a function of the short-term swings of US / global stocks.  No change with below:

1 - We are likely to add to our bearish ETF into any short-term strength in the S&P500, ideally up towards the 2950 area.

2 – MM is looking to be fairly aggressive buyers of any 5% spike lower by US stocks / global indices. In line with our cyclical comments above a decent portion of this buying is likely to be focused in Asian facing stocks.

Below are  3 stocks which MM is watching carefully for signs of what comes next and opportunities into any sell-off.

1 Apple (AAPL US) $US205.70

Apple continues to hold the illustrated uptrend line below, a break of this technical support is likely to coincide with a sharp decline towards $US180 where MM will look to increase our position. The Apple watch was the first of the companies products to be hit by tariffs on the weekend with the major iPhone on the hit list for December, if the market starts pricing in this next group of tariffs it’s easy to comprehend AAPL 10% lower.

MM likes AAPL below $US180.

Apple (AAPL US) Chart

2 Facebook (FB US) $182.39

Facebook has already generated technical sell signals, like most US  indices, the failure above $US200 targets a retest of  $US160, or 12% lower – this along with the position of Apple implies if we get an aggressive sell off by US stocks this quarter it will be tech led.

MM likes Facebook but more  than 10% lower.

Facebook (FB US) Chart

3 Alibaba (BABA US) $172.41

We like Alibaba medium-term, it’s a  quality business we want to own with our target at least 20% higher. However its unlikely to be  immune to a sharp move lower in US equities hence we remain patient keen buyers.

MM likes BABA into weakness.

Alibaba (BABA US) Chart

MM ETF Portfolio

Sorry but still no change, MM continues to hold 3 positions in the portfolio: we are long gold, long the $A and short US stocks while still holding 80% in cash:

We remain comfortable with these 3 positions but tweaks feel close at hand when / if the correct catalysts evolve:

1 – MM plans to average our long $A position following the local currencies fresh multi-year lows below the 67c area level, we are now looking for an optimal technical set-up as we believe the $A  “looks for a low”. As mentioned earlier a spike higher by the $US due to weakness in equities might create this opportunity.

2 – We are looking to increase our bearish exposure to US stocks into a move above 2950 for the US S&P500 feels correct i.e. around 26.50 for the ProShares short S&P500 ETF which we currently hold.

3 – Thirdly MM is keen to increase our exposure to precious metals but we now prefer silver as our vehicle of choice to complement our GDX gold ETF following the metals technical breakout, and  previous relative underperformance.

Our preferred long vehicle is the iShares MSCI Global Silver Miners ETF (SLVP US). Details of this ETF are explained in this link :

MM is bullish the silver miners ETF (SLVP US).

iShares MSCI Global Silver Miners ETF (SLVP US) Chart

Conclusion (s)

MM likes sitting on our hands at this stage but we are dusting off the buy button in tune with our targeted pullback by the S&P500 towards /  below the 2750 area.

Overnight Market Matters Wrap

·         The game of snakes and ladders resumed following a day’s rest in the US with a weaker than expected manufacturing data along with the negative wave in the US-China Trade drama.

·         Across in the UK, Prime Minister Boris Johnson faces an early general election, after this morning suffering defeat in the Parliament in his efforts to push through Brexit “deal or no deal” on October 31.

·         Investors once again flocked to the ‘safe haven’ assets, with gold gaining to its highest levels in over 6 years, US 10-year bonds higher, while Crude oil sliding back sub US$54/bbl.

·         BHP is expected to give back all of this week’s gains and more after ending its US session off an equivalent of -1.01% from Australia’s previous close.

·         The September SPI Futures is indicating the ASX 200 to open 36 points lower, testing the 6535 level this morning.

Have a great day!

James & the Market Matters Team


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