Weekly equities note
Written and accurate as at: Mar 22, 2017 Current Stats & Facts
The S&P/ASX 300 rose 0.4% last week. US bond yields had been rising and the US dollar strengthening in the run up to last week’s Fed meeting, which confirmed the widely held expectation of a 25bp rate hike. The accompanying statement was less hawkish than expected; many had interpreted Chair Yellen’s recent comments on the strength of US economic growth as in indication that the Fed would “raise their dots” on rate expectations, implying an accelerated path of hikes. In the event, the dots remained constant and the Chair’s comments, while not exactly doveish, were less aggressive than the market anticipated. The US dollar and bond yields retraced some of their recent gains as a result.
The underlying picture seems to be one of an orderly and well communicated hiking cycle with the suggestion that there is a degree of coordination among central banks worldwide, in order to reduce asset distortions and minimise the possibility of a destructive currency war. The most important implication for Australian equities is that there is unlikely to be a sudden spurt of aggressive hikes, particularly as President Trump takes upcoming opportunities to make Fed appointments, which should be broadly supportive for equities. Bond yields are unlikely to fall, which renders it harder for the highly-rated bond-sensitive stocks in the ASX to outperform - yet neither are yields likely to skyrocket. This means there may be opportunities among bond-sensitives that may have been over-sold in recent months.
The S&P/ASX 300 Metals & Mining index gained 6.0% in aggregate as a weaker US dollar helped commodity prices edge higher and the miners bounced back from the soft patch of the last few weeks. Small resources led the way, with lithium miner Galaxy Resources (GXY) up 12.8%, while its larger cousins Rio Tinto (RIO) (+6.7%), Fortescue Metals (FMG) (+9.7%) and BHP Billiton (BHP) (+4.9%) all made strong gains on a better iron ore price. None of the miners expect iron ore to remain above US$90 a tonne over the medium term – although this elevated price strength has persisted far longer than can be justified by any fundamentals. That said, iron ore would have to significantly retrace to prompt earnings downgrades for the miners – most analysts are assuming medium-term prices around US$60-65 in their forecasts. The gold price also crept up and saw a good week for Newcrest Mining (NCM) (+6.1%), while Evolution Mining (EVN) (+17.8%) was the best of the small gold miners.
Elsewhere, there was little in the way of stock specific news as we remain in the post-reporting season air pocket. The S&P/ASX 200 REIT index gained 1.6% and the S&P/ASX Small Ordinaries were up 1.8%. It was the banks which dragged on the index; only Commonwealth Bank (CBA) eked out a +0.3% gain, while National Australia Bank (NAB) (-3.1), ANZ (ANZ) (-1.2%), and Westpac (WBC) (-1.4%) all weakened. There was no specific news to prompt this; however there could be an element of profit taking as the banks are all up between 17-18% over the last 6 months, versus a 9.2% return for the market.
The only other noteworthy feature of last week’s market was one of the more spectacular performances of recent years, as Stemcell United (SCU) gained 3,053.9% in a day, rising from 1c to 41c per share. The company, which is focused on the technology involved in the extraction of plant essences for traditional medicines, announced the appointment of a medical cannabis expert to its board. With a starting market cap of around $2m, it did not feature in any of our portfolios, and by the week’s end the stock had retraced a significant proportion of its gains to end up a mere 1,169.2%.
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