Morning Report / The Emerging Markets look tired, local implications? (BHP, AWC, OZL, ALL)

By Market Matters 10 November 17

The Emerging Markets look tired, local implications? (BHP, AWC, OZL, ALL)

Market Matters Morning Report 10th November 2017

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Turning back to markets, the ASX200 has continued to make fresh highs not witnessed since January 2008, about 6 weeks after the markets November 2007 peak at 6851 on the ASX 200 – which proved to be the beginning of the infamous GFC. This morning is likely to be the first major challenge to our markets resilience since October as we wake up to some pretty average market news:

1.       The Dow has fallen over 100-points overnight, only a hiccup at this stage but concerns are clearly increasing around the implementation of the Trump tax cuts.

2.       Resource stocks have been whacked overnight with BHP set to open down ~80c / 2.8%.

3.       Seasonally we have entered a very week period for our banks.

At MM we are simply sticking to our thoughts of recent weeks:

1.       We are bullish the ASX200 targeting higher levels but the risk / reward is not currently compelling at today’s levels.

2.       MM are likely to be active buyers if local stocks experience a decent correction over the next 1-2 weeks.

ASX200 Daily Chart

How correlated are we to the Emerging Markets Index?

The Emerging Markets (EEM) have enjoyed a stellar run since early 2016 gaining around 70% with only one reasonable pullback of 11.4% in late 2016. While the index has generated no sell signals it is now close to our long-term target and like many stock indices overdue a pullback.

From a simple risk reward perspective, we are not buyers of the EEM until we see at least a correction of ~5%.

The correlation between the EEM and both the ASX200 and BHP (shown below) is impressive, hence it makes no sense to chase local stocks particularly resources  if the EEM is due some consolidation, or a correction.

Emerging Markets v BHP Billiton (BHP) Monthly Chart

It was interesting overnight to see pronounced weakness within the resources space, led by the European stocks, when the activity in the underlying commodities was mooted at best e.g. copper down -0.3%, iron ore up +0.1% and crude oil +0.5%. With BHP set to open down almost 3% this morning the stock will be trading within a few cents of where we exited the stock back in September illustrating why we apply a more active approach to resource stocks compared to say the financials.

RIO is also worth mentioning here, given the off market buy back ends today which would have clearly had an impact on the share price in recent weeks. Simply, sellers of RIO would have likely tendered stock into the off market buy back given the tax benefits, which reduces on market sell orders. With fewer sell orders, RIO has been able to grind higher. Today marks the end of this scenario and subsequently, there is a good chance RIO pulls back from here.

Ideally, we will buy back into BHP at lower levels following a ~5% correction in the EEM.

BHP Billiton (BHP) Weekly Chart

As we have explained over recent months we are bullish the “reflation trade” over the coming years i.e. higher interest rates, rising inflation and commodity prices. Hence, we are looking for optimum entry levels into the relevant stocks.

Our favoured space at present is the base metals and we feel their index has probably commenced another ~7% correction leading us to start laying plans for potential buying opportunities moving forward.

See 2 such stocks in the “Portfolio buys we are considering” section.

Base Metals Spot Index Weekly Chart

Portfolio buys & a sell we are considering. 

1 Buy Alumina (AWC) $2.33

We enjoyed a successful foray into AWC earlier in the year although the stock subsequently rallied ~10% higher than our target. Current weakness / potential weakness in the sector may present the opportunity to re-enter around $2.20 targeting $2.50 – an active position.

MM is accumulators of AWC around the $2.20 area, or 5% lower.

Alumina (AWC) Weekly Chart

2 Oz Minerals (OZL) $8.72

OZL is a volatile and at times unpredictable beast, we avoided buying the stock under $8.25 recently because copper looked “wobbly” which has proven correct but OZL has still rallied almost 10%!

However, the one thing I would say with confidence around OZL is more opportunities are not far away.

We will be buyers of OZL into weakness around $8, not a pipe dream with this stock.

OZ Minerals (OZL) Daily Chart

3 Sell Aristocrat (ALL) $23.85

MM has enjoyed painless and profitable ride on ALL to-date but as this market darling tests fresh 2017 highs we will not be afraid to take profit above $24.50 assuming no fresh news has hit the market.

MM will potentially sell our ALL position if / when it trades above $24.50.

Aristocrat (ALL) Weekly Chart

Global Indices

US Stocks

US equities slipped ~0.4% overnight but after much lower earlier in the session.

Overall there is no change to our short-term outlook for US stocks, where we would advocate patience ideally targeting a ~5% correction for the broad market to provide a decent risk / reward buying opportunity.

US S&P500 Weekly Chart

European Stocks

European indices fell heavily last night, well over 1% led by the resources sector. While they remain bullish technically at current levels we would not advocate buying from a risk / reward perspective.

Euro Stoxx 50 Weekly Chart

Conclusion (s)

We still believe the market has further to travel on the upside but from a risk / reward basis we would not be chasing right now on an index level, of course individual stocks may provide excellent opportunities.

We feel on balance patience is definitely prudent when considering the base metal stocks at current levels.

Overnight Market Matters Wrap

·         The US equity markets finally had a breather and had one of their biggest sell offs in the last few months after it appeared that the senate would delay proposed corporate tax cuts by a year to 2019.

·         European markets also slumped on the back of disappointing earnings, in particular from industrial giant Siemens, with the German DAX off 1.5% overnight.

·         Industrial commodities were also generally weaker leading to both BHP and RIO hit hard in overnight trading, down 2.4% and 2.9% respectively. On the other hand Both the oil and gold prices firmed around 0.5%.  BHP is expected to underperform the broader market after ending its US session down an equivalent of 2.48%.

·         Concerns on delays in the tax package saw volatility spike from near all-time lows and the US$ weaker across most major currencies. The A$ firmed to US76.8c and the futures are pointing to the local market opening 0.5% weaker.

·       The December SPI Futures is indicating the ASX 200 to open 24 points lower towards the 6025 area this morning.

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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