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Weekly Market Review

Written and accurate as at: Oct 26, 2017 Current Stats & Facts

The Australian equity market continued to break out of its recent range, with the S&P/ASX 300 gaining an additional 1.5% last week. There is little beyond the waxing hope of some progress on tax reform in the US in terms of broad macro-economic drivers – although sentiment here has swung sharply from a few weeks ago, when many had all but given up on the Trump administration’s ability to build a tax deal with Congress. Renewed optimism saw a small pick-up in bond yields, but this did not feed through to significant underperformance from bond-sensitives on the ASX, with the S&P/ASX 200 AREITs index up +1.5%. The S&P/ASX 300 Metals & Mining index gained +0.8% as winter production shutdowns in China give hope of some supply side tightening to support prices. In this vein, iron ore was flat, while copper gained +1.0%.

Telecom provider Vocus Group (VOC) (+15.2%) was among the market’s best performers last week, bouncing back from heavily-sold levels, but making little impression on the almost 70% fall it has endured from it heights of June last year. Fairfax Media (FXJ) also did well, probably enjoying a boost from the roadshow for the spin-off of their Domain on-line real estate arm.

Several energy stocks bounced, including Origin Energy (ORG) (+5.3%) and AGL Energy (AGL) (+3.6%). Ironically, the government’s proposed National Energy Guarantee policy may end up supporting higher energy prices over the medium term, as it removes the potential risk of an overbuild in renewable energy capacity in the next few years.

Several financials had as strong week. Challenger (CGF) (+8.9%) did well as the market responded well to its update on fund flows.  Elsewhere, QBE Insurance (QBE) was up +5.9%, following its fall on management’s downgrade due to the cost of the unusual number of large natural catastrophes. This bounce may be motivated in part by the notion that insurance premiums will have to rise if the recent run of events crimps returns and tempers the appetite for non-traditional sources of reinsurance, such as catastrophe bonds. Bank of Queensland (BOQ) (+4.4%) delivered a decent full year result which highlighted that the broad margin backdrop remains supportive for banks. However, they did note signs of a pick-up in mortgage discounting which may herald the end to a relatively benign period of competitive intensity, which could have important implication for the broader banking sector.

Lendlease (LLC) (-9.6%) was the market’s worst performer as it revealed that construction losses will chew into this year’s profits. While the hit to earnings is probably only in the order of 4-5%, the disproportionate market reaction is likely driven by the stock’s recent re-rating, as well as a sense of disappointment that management did not highlight the issue during earnings season. Sirtex Medical (SRX) (-4.4%) fell on news that a competitor’s product had gained regulatory approval, while Crown Resorts (CWN) was also one of the market’s worst performers, down -5.7% following allegations, made under parliamentary privilege, that it had been illegally rigging the results on pokie machines.

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