Summary: - Over the past four days England has retained the Ashes, a Federal election has been called, the GWS Giants won their first match this year and Geelong and Hawthorn both lost for the first time in many years. - Global sharemarkets have begun to exhibit signs of fatigue despite a spate of solid-enough economic data over the weekend and on Monday night with the combined US ISM surveys pointing to economic growth of +3.0%, with Europe’s reading also above the flash estimate and China’s steady on Saturday. - The MSCI World Index was slightly lower (-0.1%) as gains in Asia (+0.2%) and Europe (+0.04%) were offset by losses in the US (-0.2%). In other financial markets, 10-year government bond yields were mostly higher as bonds experienced capital losses (US treasuries at 2.64%, UK at 2.44%, but Japan dipped to 0.77%), but high beta currencies were mixed (AUD +0.1% to 89.3 and the Euro -0.2% to 132.59) as were commodities: - gold -0.6% to USD1,302.60 per troy ounce. - oil -0.4% to USD106.50 per barrel. - Dr copper -0.2% at USC316.75 per pound. - base metals were mostly lower (other than for zinc and tin). - Iron ore +0.8% to USD131 per metric tonne. The SPI suggests that the Australian market will open -9 points lower (-0.2%) at 10am AEST. Market news Asia – Asian markets followed on from a positive session over the weekend in the wake of a modestly positive US labour market report, where jobs growth was below expectations, but US unemployment declined to 7.4% following a decline in the participation rate. Although the overall regional mood was positive with the MSCI Asia Index (+0.2%) in the black, there was mixed performance with gains in China (+1.0%), Taiwan (+0.4%), Hong Kong (+0.1%) and India (+0.1%), whereas Korea (-0.4%), Singapore (-0.4%) and Japan (-1.0%) declined. In the local sharemarket, the S&P/ASX 300 Index closed -6 points lower (-0.1% to 5,067) with six sectors closing in negative territory with losses led by consumer staples (-0.4%), utilities (-0.4%) and financials (-0.3%). Europe – European markets followed the positive Asian lead, but faded late in the session after a weak US opening with the EuroStoxx Index (+0.04%) closing in positive territory for the sixth consecutive trading session. In the major markets a rise was recorded in France (+0.1%) whereas Germany (-0.1%) and the UK (-0.3%) both declined, whereas periphery markets were little changed with modest gains in Ireland (+0.2%) and Greece (+0.1%), whereas Italy (-0.1%), Spain (-0.2%) and Portugal (-0.3%) recorded slight declines. US – on Wall Street, the Dow Jones Industrial closed down -46 points (-0.3% to 15,612) with the S&P 500 (-0.2% to 1,707) and the NASDAQ (+0.1% to 3,693) posting slightly better, albeit subdued, results with eight market sectors posting losses led by utilities (-0.8%), industrials (-0.4%) and energy (-0.3%), whereas only consumer staples (+0.1%) and IT (+0.2%) closed in positive territory. Economic news Australia/Asia – Retail sales fell short of expectations for a fourth consecutive month in June (0.0% against expectations of +0.4%) with a sharp deterioration occurring in WA as the mining investment jobs cull starts to impact household spending. The overall weakness confirms that the much anticipated turnaround in household spending remains elusive and that spending in this sector remain at its weakest level since 2009 despite record low interest rates. Given weakening wages growth, high household debt, increasing unemployment and sustained high savings rate, it is very hard to construct a thesis of how household spending can improve in 2013. This adds more weigh to the case for more interest rate relief at today’s RBA policy meeting. Europe – The final Eurozone services sector PMI for July (50.5) posted a slight gain over the flash estimate, which represents the first time in 18 months the final reading has been in expansion territory, with an activity index in the UK up to a six and a half year high of 60.2. US – The US service sector PMI rose in July (to 56.0 from 52.2 in June) from a three year low as the inventory cycle once again revved up with new orders (jumping from 50.8 to 57.7) up to a five month high and indicating that US growth will improve in the H2 2013 (from +1.7% pace in the June quarter). However, the employment indicator weakened (from 54.7 to 53.2) and exports remained in contraction territory (from 47.5 to 49.5). The combined US index suggests US growth could accelerate to around +3.0% in the next six months which will support the sharemarket and place pressure on the government bond market. Company news Europe - BHP Billiton (+0.4%) was the major talking point of a lacklustre London market amid acquisition speculation, in which broker Merrill Lynch indicated that the company should consider buying Mosaic, who is North America’s second largest potash producer, for USD20 billion. This acquisition would give the company (who is determined to build a world-scale potash business) critical scale via a low-cost, long-life asset. Meanwhile, Thomas Cook (+5.5%) climbed strongly following an upgrade to ‘buy’ from Citigroup on the back of their cost-out drive. Conversely, HSBC (-1.3%) weighed on the market index after its half-year earnings report missed expectations, which saw some profit taking in other sector plays with Standard Chartered (-1.3%) and Royal Bank of Scotland (-1.6%) both down. Elsewhere, Domino’s Pizza (-3.6%) was lower on news that an early investor in the company had sold his stake. US - US markets were fairly flat with a late sell-off in the wake of elevated concerns about the US labour market. JCPenney (-1.3%) dropped despite announcing it had poached one of Kraft’s senior executive to head its marketing division as the company sought to return to its discounting ways, although analysts were worried about the extent to which the company is absorbing its cash reserves. Meanwhile, strong earnings from meat producer Tyson Foods (+3.8%) sent its shares higher as the company proved it had coped with higher feed prices and beat expectations on both revenue and net earnings. Elsewhere, Berkshire Hathaway (+0.6%) issued a positive earnings report which beat market expectations on the back of a strong result from its rail and financial derivatives business. Finally, in IT-land another good session by Facebook (+2.9%) boosted the NASDAQ index after brokers upgraded the stock to ‘buy’. Data releases Australia/Asia Economics – August RBA interest rate decision (Jul: 2.75%, exp: 2.5%), June Australian trade balance (May: AUD670 million) and June quarter Australian house prices (Mar qtr: +0.1%) and July Australian job advertisement (Jun: -1.8%). Equities – Downer EDI and Cochlear are expected to post full year results. Europe/US Europe – June quarter Italian GDP (Mar qtr: -0.6%), June Eurozone industrial production (May: +0.1%), June UK industrial production (May: 0.0%). US – June US trade balance (May: -USD45.0 billion). What is the key investment message overnight? Overall the past week, US data has been mixed with the weaker-than-expected labour market hiring and declining service sector employment PMI weighing on sentiment despite a decline in the US unemployment rate. This confirms my view that the US recovery, whilst positive with reduced downside risk, is extremely tepid and the Fed is going to need several months of consistently strong consensus-beating tier one data, before they consider tapering, which is still (at least) several months away. This suggests imminent tapering is unlikely especially considering the US debt ceiling debate remains unresolved and this had a highly destructive impact in 2011. In this environment ‘quality’ companies that deliver on revenue growth are likely to be subjected to capital inflows and broker upgrades, whereas those with weak operating models and weak balance sheets are likely to be left behind. _______________________________________________________ Matt Sherwood | Head of Investment Market Research | Asset Management - AEQ Perpetual | Angel Place | Level 16, 123 Pitt Street Sydney NSW 2000 | Australia Phone +61 2 9229 9879 | Fax +61 2 8256 1476 | Mobile +61 434 363 394 perpetual.au
Posted on: Tue, 06 Aug 2013 01:56:22 +0000
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