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Weekly market update

Written and accurate as at: May 29, 2018 Current Stats & Facts

The local market fell by almost 1% last week as a fall in the oil price drove investors from resources.  Brent Crude fell from a touch under US$80 on Wednesday to close near US$76 on Friday on signals that the Russians and Saudis, having reduced inventories and the market’s imbalance, may look to relax the production limits which have supported rising oil prices over the last year.

It seems the US has a limit to the extent to which they are comfortable with stronger oil prices before its starts to act as a drag on growth. Recent pressure from the White House on the Iranians – perhaps as quid pro quo for a relaxation on production by the Saudis – and shots across the Russian bow in terms of sanctions, can both be interpreted in this light. The inference is that unless we see stronger demand, the oil price may be capped in the low-US$80s for the moment, with Russian commentators suggesting they are comfortable with oil trading in a US$65-75 band.

While the oil/LNG stocks such as Woodside (WPL, -4.2%), Oil Search (OSH, -4.0%) and Santos (STO, -5.8%) all pulled back on a weaker oil price, it is likely they will continue to make a lot of revenue and free cash flow at these levels. STO fell further than its peers; it has greater leverage to the oil price but this was also likely a reaction to news that it had rejected the takeover bid from Harbour energy.

Miners also underperformed, with Fortescue Metals (FMG, -6.6%), South32 (S32, -6.5%) and Alumina (AWC, -6.2%) among the weakest. Outside of resources, insurer QBE (QBE, -6.7%) was among the worst performers.

US 10 year Treasury yields dropped back below 3.0%, causing investors move into listed real estate and infrastructure stocks. Sydney Airport (SYD, +4.3%) and Transurban (TCL, +4.0%) were among the best performers as a result.  There was also some buying of list real estate ahead of the settlement of Westfield’s (WFD) sale to Unibail Rodamco, when the return of cash from 7th June is likely to see a significant reallocation of funds across the rest of the listed property universe. 

Outside of the defensive bond sensitives, Aristocrat Leisure (ALL, +10.3%) was among the market’s strongest, following a result in which its recently acquired digital business performed better than consensus expectations. Metcash (MTS, +7.3%) also benefited from a broker upgrade on the back of less deflation in grocery prices.

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