Weekly market update - 25th of September 2018
Written and accurate as at: Sep 25, 2018 Current Stats & Facts
Resources bounced back last week, gaining approximately 3.4% whilst financials also made some ground increasing by a little over 1%. Weakness in the more rate-sensitive parts of the market such as property dropped -2.2% which in aggregate saw the broader market crawl slightly higher for the week at +0.5%.
The bounce in miners seems to indicate a degree of relief at the scale of the tariffs on China announced by the Trump administration last week. The relative lack of inflammatory rhetoric from President Trump and the measured response from the Chinese side have some thinking that a more rational approach to recent trade tensions is emerging. We are not so sure. The US Republicans are likely to position trade with China as a key issue ahead of the midterm elections in early November, leaving plenty of scope for a further escalation of pressure. There is also a sense that the Chinese government may delay any agreement until after the elections, on the view that it would be better to negotiate with a Trump administration less focused on posturing for the domestic electorate. As a result, we may see a respite in trade tension for a period, but for the moment we do not see this as a turning point.
Nevertheless, this was enough to see the miners outperform with Rio Tinto (RIO, +8.7%), Fortescue Metals (FMG, +7.9%), BHP (BHP, +5.5%) and South32 (S32, +4.0%) all making solid gains. RIO’s bounce was also helped by the announcement of an additional US$3.2bn buyback, to return the proceeds of coal asset disposals to shareholders. Commodity prices ticked up in most instances and remain in a reasonable range, providing continued momentum in earnings upgrades for several Australian miners. Outside of resources, Metcash (MTS) was a notable outperformer, up +6.6%. There was little in the way of news flow for MTS, but it continues to see strong buying support as it bounces back from its lows of July.
Government intervention remains a key source of disruptive risk given the prevailing populist trends in Western democracy. The banking, wealth, insurance and energy sectors have already been hit from this direction – and last week aged care joined the fold as the federal government flagged a potential Royal Commission into the sector in response to adverse media coverage. Estia Health (EHE, -18.3%) and Regis Healthcare (REG, -18.0%), the two largest listed aged care providers, both took a hit. Origin Energy (OR, -4.4%) continued to sell-off post its disappointing result, which revealed the scale of the earnings drag from government pressure on electricity prices. ORG is quite interesting at this point given the market seems to be ignoring the strong and improving fundamentals in the LNG-production part of its business.
The existing Royal Commission into financial services was focused on insurers last week, with stories emerging of a mismatch between the cash settlement offered to rebuild insured homes and the actual cost to do so. While this suggests the insurance claims process will ultimately be subjected to regulatory oversight, the market has largely shrugged this off for the moment with Suncorp (SUN, +1.0%), Insurance Australia (IAG, +0.3%) and QBE (QBE, +1.0%) largely unmoved.