Summary: - There is a cautious tone to markets developing as the recent equity rally struggles to maintain momentum. Indeed, global sharemarkets gave back some of their recent gains overnight despite continued positive economic data in Europe and the US, but the sell-down ‘sentiment’ seems to be one of caution, rather than panic. - The MSCI World Index was lower (-0.6%) with widespread losses in Asia (-0.5%), the US (-0.6%) and Europe (-0.6%). In other financial markets, 10-year government yields were all higher as bond experienced more capital losses (US treasuries at 2.64%, UK at 2.48% and Japan at 0.78%), but high beta currencies were higher (AUD +0.7% to 89.91 and the Euro +0.4% to 133.08) and commodities were mixed: - gold -1.5% to USD1,283 per troy ounce. - oil -1.1% to USD105.40 per barrel. - base metals all lower (other than tin). - Dr copper +0.2% at USC317.00 per pound. - Iron ore +2.4% to USD130.00 per metric tonne. The SPI suggests that the Australian market will open -19 points lower (-0.4%) at 10am AEST. Market news Asia – Asian markets followed a negative lead from Wall Street, with the overall MSCI Asia Index (-0.5%) lower with prices down in India (-2.3%), Hong Kong (-1.3%), Taiwan (-1.2%), Korea (-0.5%) and Singapore (-0.4%), whereas gains were seen in China (+0.5%) and Japan (+0.8%). In the local sharemarket, the S&P/ASX 300 Index closed -6 points lower (-0.1% to 5,061.3) with five sectors closing in negative territory with losses led by energy (-0.9%), consumer discretionary (-0.7%) and healthcare (-0.6%), whereas gains were recorded by industrials (+0.2%) and telcos (+0.4%). Europe – European markets followed the negative Asian lead with the EuroStoxx Index (-0.6%) declining late in the session to end at its daily lows. In the major markets losses were recorded in Germany (-1.2%) and the UK (-0.3%), whereas France (+0.1%) experienced a small gain. In the periphery performance was similar to the majors with Portugal (-1.0%), Italy (-0.4%), Spain (-0.4%) and Ireland (-0.2%) closing in negative territory, whereas Greece (+0.9%) rose once again. US – on Wall Street, the Dow Jones Industrial Average was in the red all session long and closed down -93 points (-0.6% to 15,519) with the S&P 500 (-0.6% to 1,697) and the NASDAQ (-0.7% to 3,666) slightly underperforming with all ten market sectors posting losses led by materials (-1.0%), financials (-0.9%) and industrials (-0.7%), whereas telcos (-0.4%) and consumer staples (-0.1%) did best. Economic news Australia/Asia – The Reserve Bank of Australia reduced the target cash rate to a fresh historic low of 2.50%, which represented its eighth reduction this cycle. Clearly the RBA is of the view that the Australian economies transition is not occurring fast enough to fill our AUD40 billion mining investment ‘growth hole’ that will collide with the economy in 18 months’ time. The major problem for the RBA is the state of household balance sheets, where households do not want to increase spending or leverage. Meanwhile, the ANZ job ads declined another -1.7% in July, which represents its fifth consecutive decline with an annual rate of -18.6% indicating further weakness for the employment growth. Elsewhere, Australia recorded a fifth consecutive trade surplus in June, albeit below expectations at +AUD0.6 billion, which suggests that export growth should add to GDP growth in the June quarter. Finally, Australian house prices rose strongly (+2.4%) in the June quarter and surpassed their previous nominal cyclical peak, although it remains well below its ‘real’ peak. Europe – June quarter Italian GDP came in ahead of markets expectations (-0.2% vs -0.4%), potentially setting the scene for a return to growth later in the year. Meanwhile, German factory orders surged (+3.8%) in June after declining for the two previous months and UK industrial output (+1.1%) grew at the its faster pace in more than two years as manufacturing activity (+1.9%) recorded a sharp rise and added to the data set that says the UK economy is on the mend. US – the US trade deficit narrowed sharply in June (to USD34.2 billion), which is the lowest trade balance since October 2009 and was well ahead of market expectations (USD43.5 billion) with the May deficit also revised lower. This result could see GDP growth upgraded by +0.6% to +2.3% and is one of the signs the US Fed will be looking for to begin the tapering of its QE program. Company news Europe - Resource stocks weighed on the UK market with precious metals miner Fresnillo (-10.8%) leading the sector lower after it cut its dividend by two-thirds due to poorly timed sales of gold and silver, which sent its industry peers down with Randgold (-5.5%) and Polymetal (-4.6%) also closing in the red. Similarly, steel manufacturer Evraz (-4.4%) was lower after its German peer (Salzgitter) cut its full-year earnings guidance, blaming ‘the persistent structural crisis in the European steel industry’. Conversely, Salamander Energy (+4.1%) rose after the company revealed that its second well off the cost of Thailand had struck oil. Meanwhile, InterContinental Hotels (+6.4%) lead the pace of gains among the blue-chips after announcing a special dividend following better than expected interim earnings. Among financials Standard Chartered (+2.9%) was higher after its interim results eased fears about the impact of a slowdown in the emerging markets and insurer Legal & General (+2.3%) also beat expectations with its interim figures. US - The materials sector led the US market lower as investors sold down cyclical stocks including Monsanto (-2.5%) and US Steel (-1.6%) as some base metals prices declined and investors decided to take profits after the markets’ recent surge. US banks joined in the market sell down with Goldman Sachs (-1.9%), JPMorgan Chase (-1.1%) and Bank of America (-1.0%) all recoding negative centuries even though company specific news was somewhat scant. Among Dow stocks, IBM (-2.3%) was the hardest hit following a downgrade to ‘underperform’ from Credit Suisse., with the Tuesday decline taking the stock into negative territory in 2013 after a fairly disappointing earnings result and guidance. Meanwhile, shares in the Washington Post Company rose strongly (+5.5%) after the company sold its namesake newspaper to Amazon founder Jeff Bezos for USD250 million, with the company continuing to focus on educational, magazine and television interests. Data releases Australia/Asia Economics – June Australian housing finance (May: +1.8%, exp: +2.0%). Equities – BHP Billiton chief executive Andrew Mackenzie is set to speak at an Asia Society Australia lunch, in Melbourne, and 21st Century Fox (formerly News Corp) posts full year results in the US. Europe/US Europe – June German industrial production (May: -1.0%, exp: +0.3%) and June France trade balance (May: -€6.0 billion, exp: -€5.4 billion). US – June US consumer credit (May: USD19.6 billion, exp: USD15.0 billion). What is the key investment message overnight? It does appear that global economic data is set to improve in the second half of 2013, with US growth and European data recently improving. The question investors need to ask is whether the improvement is cyclical after several years of soft growth, or is it a structural improvement that can withstand any withdrawal of stimulus. Another thing that investors need to weigh up is where the best investment opportunities are; in the US earnings growth is limited to GDP growth and valuations are somewhat stretched, whereas in Europe growth opportunities are better, valuations are more attractive, but the banking sector remains rife with problems that can flare at any moment. Perhaps it is better to forget about the trend of the market and instead look at the trend within the market, where quality cash-flow generating business models are best placed to deliver on expectations in a still tough macro environment. _______________________________________________________ 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: Wed, 07 Aug 2013 01:41:26 +0000
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