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Weekly market update - 8th of October 2018

Written and accurate as at: Oct 11, 2018 Current Stats & Facts

The shift in US bond yields dominated financial headlines last week, as 10-year Treasuries breached several technical barriers to finish at 3.23%. Australian listed property and financial stocks fell albeit largely offset by the continued bounce of resources leaving a net effect of the broader market finishing flat.

Australian bonds yields have not followed the US upwards, given the different rates of economic momentum. In this regard, Friday’s employment data release in the US continues to paint a picture of a tight labour market and implies further pressure to increase wages – and support further rate hikes. The relative growth and rate outlook are also seeing a softer Australian dollar versus the greenback, providing a tailwind to those companies with overseas earnings. Elsewhere, China reduced the banking system capital reserve ratio requirement (RRR) over the weekend. 

Still in China, changes to the laws governing the daigou channel – in which products are bought overseas then sold online in China – saw A2 Milk (A2M) drop -6.9%. Management have been quick to state that the laws, framed to curtail the sale of fake product, will not hit sales. There remains significant uncertainty over the scope and scale of their implementation.

Recent data suggests new building approvals in Australia are starting to slow. There appears to be a surplus in new buildings under construction as we work through the lagged effect of all approvals granted over the past couple of years, while demand moderates. This could lead to a fall in new approvals while this surplus demand works through, which could cause a greater ‘sticker shock’ around housing than many currently expect. Concern here weighed on REA Group (REA, -5.0%) during the week; although new housing starts do not directly affect their outlook, there is a correlation between it and housing turnover which may drag on future revenue. Other housing related stocks such as Boral (BLD, -2.0%) and Lendlease (LLC, -4.2%) were also weaker. James Hardie (JHX, -3.6%) was down on the expectation that higher rates may start to bite in the US housing market.

Elsewhere, a stronger oil price in recent weeks has seen Qantas (QAN, -2.9%) underperform. While QAN’s hedging programme complicates the relationship between oil prices and their fuel bill, there is little doubt that a stronger oil price over the last year is leading to higher fuel costs – a fact management flagged at their August results presentation. While the market continues to focus on this headwind, a stable domestic duopoly and industry capacity, coupled with a gradual increase in demand, is seeing improved yields which will help offset higher fuel costs. At the same time, QAN’s capital management programme is seeing significant value returned to the shareholder.

Norsk Hydro’s moves to shutter the Alunorte alumina refinery in Brazil – which is responsible for 5% of global supply - saw fellow alumina producers Alumina (AWC, +10.9%) and South32 (S32, +9.0%) gain on the expectation of further price strength. Alunorte had been running at 50% capacity since February following the release of untreated emissions into local water systems, which has subsequently driven tighter markets and strong gains from other players in the bauxite/alumina/aluminium complex. There have been recent signs of impending agreement between Norsk Hydro and Brazilian authorities to ramp up production – however last week’s moves suggest this process may be under threat. It is uncertain to what degree this may be a negotiating tactic or reflect genuine concern over operations at the refinery going into the wet season. For the moment alumina pricing remains high, to the benefit of Australian producers.

Other outperformers included Graincorp (GNC, +4.7%) which, having sold down on the effects of the east coast drought, saw last week’s widespread rain provide some small measure of relief. QBE Insurance (QBE, +5.1%) gained along with US bond yields, as the latter will help returns on its investment book, while the market also liked Coca Cola Amatil’s (CCL, +4.6%) further expansion in to non-carbonated drinks via a stake in Made Group, makers of flavour-infused NutrientWater.

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