Summary: => On Saturday morning, global sharemarkets closed out their worst start to a calendar year since 2010. Continued stresses in the emerging economy and concerns about what US Federal Reserve policy is doing to the region, left investors nervous and seeking the protection of low beta currencies and highly-rated government debt. Interestingly, despite expectations that it was bad for US bonds and good for US equities, since the US Fed’s initial taper decision in December 2013, the US 10-year bond prices are up around 6%, whereas stocks are down around -2%. => Although economies like Turkey and Argentina couldn’t drive a US downturn through the trade channel, the risk here for the economy is contagion and this filters down to financial markets, through the price of risk. After QEI the US market declined -11% and after QEII it dropped -14%, so if history is any guide, we have not seen the last of volatility for 2014. Indeed, most regions were down as they closed out the week and the month, with the MSCI World Index declining (-0.6%) with losses in the US (-0.6%), Europe (-0.5%) and Asia (-0.1%). => In other financial markets, 10-year government bond yields were universally lower (US Treasuries down to 2.65%, UK gilts lower at 2.70% and Japanese bonds closing at 0.62%), high beta currencies were down as investors sought the safety of the Yen and the US dollar (AUD -0.1% to 87.46 and the Euro -0.01% to 134.84), and commodities were mixed: - gold +0.5% to USD1,245.60 per troy ounce. - Iron ore was steady at USD122.63 per metric tonne in US futures markets. - Dr copper -0.5% at USC322 per pound. - oil -0.8% to USD97.49 per barrel. - base metals all recorded losses of over -1.0% (other than lead (+0.1%)). => The SPI suggests that the Australian market will open -23 points lower (-0.5%) at 10am AEST. Market news => Asia – Asian markets were relatively quiet at the end of the week with most markets closed for the Lunar New Year festivities. Japanese data was the primary focus and although it was mostly positive and pushed stocks in Tokyo up early, this momentum faded in the afternoon despite the lack of a clear catalyst. Overall, the MSCI Asia Index (-0.1%) was slightly down, with losses in Japan (-0.3%) offset by a late rally in India (+0.1%) with Korea, Singapore, China, Hong Kong and Taiwan all closed for national holidays. Meanwhile, the S&P/ASX 300 Index closed +3 points higher (+0.1% to 5,146) on Friday with five sectors closing higher led by utilities (+1.3%), consumer discretionary (+0.9%) and industrials (+0.2%), whereas losses were led by financials (-0.1%), IT (-0.5%) and healthcare (-0.5%). => Europe – European markets followed the negative lead from Tokyo and mixed corporate news and generally under-whelming regional economic data saw investors hit the sell button and indices weakened coming into the close. Overall, the EuroStoxx Index (-0.5%) closed lower with the number of decliners beating advancers by a 16-3 ratio and declines in the major markets were led by France (-0.3%), the UK (-0.4%) and Germany (-0.7%). In the periphery markets performance was a bit more mixed with losses in Portugal (-1.0%), Ireland (-0.7%) and Spain (-0.4%), whereas Italy (+0.03%) and Greece (+1.8%) both improved. => US – on Wall Street, stocks dropped at the opening (the Dow was off -221 points in the first hour) amidst disappointing US earnings results (from Amazon and WMT) and several profit warnings. However, macro releases during the session provided some respite to investors and some indices lifted into positive territory, but couldn’t hold onto the momentum and closed lower. By the closing bell, the US had completed its fifth consecutive session during which the market did not record consecutive directional moves with the Dow Jones Industrial Average closing down -150 points (-0.9% to 15,699) with the S&P 500 (-0.7% to 1,783) and the NASDAQ (-0.5% to 4,104) slightly outperforming. At the sector level, seven sectors closed lower led by energy (-1.5%), consumer discretionary (-1.3%) and financials (-1.1%), all of which posted losses greater than -1%, whereas IT (+0.2%) and utilities (+0.8%) led the advances. Economic news => Australia/Asia – Australian private sector credit growth continued its modest but gradual improvement in December with the amount of new loans increasing by +0.5%, which was its first beating of consensus (+0.4%) in five months. Gains were broad-based with increases in housing (+0.6% m/m, which bought the annual rate up to +5.9%), personal (+0.2%, +0.9%) and business (+0.4%, exp: +1.7%). The RBA has stated that it wants the leverage recovery to broaden into business and there is little here to suggest that businesses are re-positioning themselves for increased investment in either capital or labour. Meanwhile, over the weekend, the official Chinese manufacturing PMI came out which detailed a moderation from 51.0 to 50.5, which confirmed what was contained in the HSBC measure in that Chinese activity has moderated and the Chinese authorities are risking underperforming there +7.5% growth target, if things don’t improve. => Europe – Europe’s labour market remains in the doldrums with unemployment rate remaining at 12.0% in December, although the level of youth unemployment (23.4%) fell for the first time in a long time which may be a sign that things are at least stabilising. However, that is where the good news ends, with the region’s inflation rate declining to +0.7% y/y (well below consensus at +0.9%), which is back to a level where the ECB last cut rates (in November). Some economists and analysts stated that the data shows that further stimulus is needed, but I think it shows that rate cuts from 0.5% to 0.25% are meaningless and only symbolic. Instead a broad-based QE program is needed to prevent a Japanese-style deflationary spiral and to repair regional balance sheets. => US – US personal income was unchanged in December (below consensus of +0.2%) which continues the US’s biggest problem, namely, weak wages growth and a continued fiscal contraction in 2014 may possibly lead to weaker consumer spending and economic momentum. However, US personal spending increased a solid +0.4% (above consensus of +0.2%, but below November result of +0.6%) as consumers continue to reduce their savings rate to fuel spending. Meanwhile, the University of Michigan’s confidence reading skipped to 81.2 in January (82.5 in December), suggesting that US growth is likely to slow down in the March quarter 2014. Major company news => Europe - UK markets had a poor week and nothing really improved on Friday night with consumer staples and financial stocks struggling. In particular, shares in Coco-Cola HBC (-3.2%) led the blue chip decliners amid persistent concerns that cost pressures from a weak currency in Russia and Nigeria will curtail market hopes for a recovery in margins. Meanwhile, shares in Standard Chartered (-1.6%) declined despite growing rumours that the stock is a takeover target from a Canadian predator Scotiabank, with the combined group having operation in every key continent with the Canadian operation able to generate enough surplus cashflow to fund the expansion of SC’s into new markets. Meanwhile, shares in government outsourcing firm Serco recovered (+3.3%) from the plunge following its second profit warning in two months, with brokers detailing a lack of concern, as their balance sheet has seen this much debt before and recovered. => US - Despite solid US personal spending data, shares in toy-maker Mattel plunged (-12.0%) after the company said sales of its dolls (including Barbie) came up short of expectations, which led to a -6% decline in revenue to USD2.1 billion in the three months to December. However overall earnings were higher, due to last year’s litigation expenses washing out of the annual P&L statement. Meanwhile, shares in Amazon recorded their steepest decline in two years (-11.0%) after sales growth slowed down in the final months of the year (with revenue coming in at USD25.5 billion, relative to expectations of USD26.1 billion) with net income moderating to USD239 million. Elsewhere, shares in MasterCard (-5.0%) were under pressure after the company missed fourth quarter revenue and earnings results due to rising costs pressures, large marketing expenses and numerous litigation charges. Sales were up +12% to USD2.1 billion with profits up to USD623 million, but this did not satisfy investors, who were in no mood to give management the benefit of the doubt. Major data releases => Australia/Asia - Economics – January Australian house prices (Dec: 1.4%), December Australian building approvals (Nov: -1.5%) and January Australian job advertisement (Dec: -0.7%). - Equities – JB Hi-Fi, Country Road and Argo Investments are expected to release first half results. => Europe/US - Europe – final Eurozone manufacturing PMI () with readings from individual countries. - US – January US manufacturing ISM (Dec: 57.0). What is the key investment message overnight? The seeming inability of US workers’ income to keep pace with the increase in spending places the sustainability of the consumption-driven US recovery into question. For the past few years, consumers have funded increased spending out of their savings pool, however, this is not an endless pit of money and it will be resolved in two potential ways. Either income will grow and weigh on corporate margins, or income with remain anaemic and spending growth will slow, which will inhibit weak operating models, which are dependent on strong macro drivers to move higher. Either way, robust operating models are best placed to deal with changes in the macro US environment, and ‘quality’ companies need to be at the forefront of investor thinking in 2014. _____________________________________________________ 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: Mon, 03 Feb 2014 06:34:48 +0000
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