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Weekly market update - 8th of October 2019

Written and accurate as at: Oct 08, 2019 Current Stats & Facts

Key economic conversations are right now focused on the efficacy of monetary policy, the potential for unconventional measures such as Quantitative Easing and the need for the federal government to augment low rates with fiscal stimulus.

This follows soft economic data which last week raised uncertainty around the trajectory of growth last week, pushing down Australian equities by around 3% along with global equities. In Australia, the RBA cut rates again.

Heightened uncertainty around global demand does raise some risk in the more cyclical parts of the market, however, we also remain mindful that sustained poor data is likely to prompt a policy response.  

Australian 10-year government bond yields last week fell from 0.95% to 0.89%, while their US counterparts came in from 1.68% to 1.51%.

The S&P/ASX 300’s dividend yield, in contrast, sits at 4.21%. We see this historically high yield premium as a source of support for equity markets.

Banks were among the hardest hit during the week. The S&P/ASX 300 Banks sector fell -5.3%, led by National Australia Bank (NAB, -6.6%).

While lower rates help support sentiment around housing, they also put pressure on banking margins. The banks are largely hedged against this risk in the medium term, however, this will feed through after a couple of years and will put pressure on an already constrained earnings environment.

Other interest-rate sensitives such as Challenger (CGF, -7.1%) also underperformed.

Concerns over growth also dragged on the energy sector. Santos (STO) fell -6.6%, Oil Search (OSH) -4.2% and Woodside (WPL) -3.7%. Miners, too, were generally weak. South32 (S32) fell -7.6%), Rio Tinto (RIO) -4.3% and BHP (BHP) -4.2%. Whitehaven Coal (WHC, +1.3%) bucked the trend.

While the macro is messy, there are signs that the underlying rotation away from previously high momentum names remains in play. Afterpay Touch (APT, -6.6%)continues to bounce around, while technology peers Altium (ALU, -5.3%) and Wisetech (WTC, -4.5%) have both weakened since early September. Xero (XRO, -1.7%) held up better than a falling market.

Very few S&P/ASX 100 stocks ended the week above water. Gold miners held their own, with Northern Star (NST) up +6.5%, Newcrest (NCM) +1.1% and Evolution (EVN) +0.7%.

Otherwise, it was the typical defensives that did best. Infrastructure (eg Atlas Arteria (ALX, +3.0%)), defensive REITs (eg Goodman Group (GMG, +1.2%)) and health care (eg CSL (CSL, +0.9%)) all made some headway against an otherwise gloomy market.

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