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Weekly market update - 22nd of July 2019

Written and accurate as at: Jul 23, 2019 Current Stats & Facts

The local market gained slightly in a market which was relatively quiet ahead of reporting season.  At a macro level, oil prices fell over 5% as the market expressed concerns over demand and global growth more generally. Iron ore was broadly flat and bonds rallied a touch.

There are signs of weakness in the US economy and specific sectors could be regarded as experiencing a ‘mini-recession’ – although whether or not the aggregate economy is lapsing into recession remains up for debate. This is not the first time the US economy has seen soft patches in the post GFC expansion era and there is an argument that these periods of deceleration can actually extend the broader cycle. Nevertheless the US economy – and the monetary policy response to it – remains a watching brief.

There was limited dispersion at a sector level. Energy lost ground on the back of a weaker oil price; most other sectors were flat to slightly up.

CIMIC (CIM, -18.0%) saw a backlash to its quarterly update, with the market concerned over weaker cash flows. CIM has been under some pressure from an institutional short-seller, who noted the use of “reverse-factoring” arrangements as an accounting tool which can potentially help improve the optics on working capital. The practice, which involves using third-party institutions to honour accounts payable, then repaying the institution, may prove to be a niche issue in the upcoming reporting season if its use is wider spread.

AMP (AMP, -16.5%) came under pressure as management announced that the sale of its life insurance and mature business to Resolution Life is unlikely to proceed following intervention by the Reserve Bank of New Zealand (RBNZ). The RBNZ requires New Zealand-related assets to be ring-fenced, which would require a renegotiation of terms with Resolution Life. Management cancelled its interim dividend as a result. Last week’s fall is notable in that the deal’s announcement in 2018 saw the stock price plummet on the belief it undervalued the assets. Its further fall on the deal’s cancellation probably reflects the fact that there has been further deterioration in the Life business in the interim.

Elsewhere, the oil/LNG stocks were weak on a softer oil price. Woodside (WPL) was down -6.2%, while in Oil Search’s (OSH, -9.9%) case this was exacerbated by ongoing uncertainty in Papua New Guinea. There is some concern that new Prime Minister James Marape will try to renegotiate the fiscal terms of the assets OSH operates in the country.

A fall in bond yields – and expectation of lower rates to come – has seen strong gains in the gold price. Gold miners led the market as a result. Australia’s largest, Newcrest (NCM), was up +4.2% while Evolution (EVN) which has greater leverage to the gold price, was up +11.6%. Northern Star (NST) gained +16.0%. The market is fixated on the strong correlation over the last two years between the value of negative-yielding bonds globally and the gold price, although this relationship has not been evident prior to this recent period. Nevertheless, there is an expectation that a shift further into negative yields could support a sustained rally in the gold price.

Outside of gold, BlueScope Steel (BSL, +6.4%) was up on the hope that signs of steel industry capacity closures in the US may see the pressure ease on pricing.Lendlease (LLC, +4.0%) was also up following the news it had landed a deal with Google in the US to build a multi-year pipeline of housing developments on the tech giant’s land-bank in the San Francisco Bay area.

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