Weekly market update
Written and accurate as at: Jun 05, 2018 Current Stats & Facts
The formation of a populist coalition government in Italy between the Lega Nord and the Five Star parties prompted a bout of mid-week market volatility focused ultimately on the risk that Italy might look to leave the Euro. Italian bond yields spiked – as did speculation over the potential for a parallel currency, Presidential impeachment, and a potential showdown between Italy and Germany over debt and fiscal discipline. However for all the concerns and uncertainty, the episode proved short-lived with most assets round-tripping over the week. US 10 year yields fell from 2.92% on Monday to 2.76% mid-week, before ending at 2.89%, with a raft of strong US data on Friday evening contradicting some concerns over waning US growth and helping to calm the market.
The S&P/ASX 300 closed -0.7% for the week and broadly demonstrated the lower beta to global indices that has marked its reaction to macroeconomic events of the past few years. This is unlikely to be the last bout of volatility associated with Italian politics, given the very thin wedge of common philosophical and policy ground between the coalition partners. The episode serves as a reminder that some of the European project’s fundamental issues have not gone away. However the short-lived market response also emphasises that investors need to be wary of over-reacting to developments in what has become a multi-year story.
Financials fared worst in the Australian market, down -1.7%, while listed property fell -0.9% and Resources managed to eke out a 0.2% gain. A combination of factors weighed on Financials. Capital market volatility weighed on stocks such as QBE (QBE, -3.7%), Macquarie (MQG, -3.5%), and Janus Henderson (JHG, -4.5%). Clydesdale Bank (CYB, -4.9%) fell on speculation that it is likely to sweeten the takeover bid it made for Virgin Money in early May. Meanwhile ANZ (ANZ, -3.8%) fell more than its Big Four peers – which were down between -0.9% and -1.9% - on the allegations of illegal collusion between it and two investment banks over the sale of a tranche of ANZ shares in 2015. The legal case is likely to be complex and last for years so, while it adds to the near-term cloud of negative sentiment hovering over the sector, the market is unlikely to remain focused upon this issue.
Metcash (MTS, -21.2%) was the market’s worst performer following news that Drakes Supermarkets chain, the largest independent chain in South Australia, would leave the MTS supply network. MTS has been in negotiations with their customers in South Australia to sign contracts that will allow them to proceed with the development of a new distribution centre. However they have been unable to come to an agreement with Drakes, which have announced the intention to move to self-supply with a new warehouse when their current contract expires in June 2019.
Elsewhere, the market was disappointed with the cost estimate increases for its Brisbane casino that Star Entertainment Group (SGR, -7.7%) announced at its investor day, while Aristocrat (All, -4.6%) and Challenger (CGF, -4.7%) both saw some profit taking after strong runs.
Dominos Pizza (DMP, +14.4%) was among the market’s best performers, while Investa Office Fund (IOF, +9.5%) also outperformed, bolstered by a private equity takeover-bid from Blackstone. IOF is benefiting from a supply squeeze due to residential conversions and building demolitions for the new Metro line. Should this deal go ahead – and it has received board backing – it leaves Dexus (DSX) and Mirvac Group (MGR) as the best assets to access this pocket of the market.
While the diversified miners were muted (BHP (BHP, 0.0%), Rio Tinto (RIO, -0.8%)) the specialists generally had a good week, led by Fortescue Metals (FMG, +5.1%) and Alumina (AWC, +5.8%). Elsewhere it was a good week for Blackmores (BKL, +10.2%) and for Nine Entertainment (NEC, +5.8%).