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Weekly market update - 14th of October 2019

Written and accurate as at: Oct 14, 2019 Current Stats & Facts

Sentiment turned more positive on both Brexit and US-China trade last week, pushing Australian equities to a +1.3% gain (S&P/ASX 300 Acc.).

Last week’s negotiations resulted in “phase one” of a trade deal which will see additional tariffs – due to go into place this week – rescinded. In response, China has agreed to buy various agricultural commodities.

There is a view they would have purchased these items anyway, given the stress swine flu has placed on food supply. However, it’s worth noting China also agreed to keep current tariffs in place, which is a departure from the initial position.

The deal is consistent with our view that President Trump is fighting on too many fronts and needs to stabilise the situation on trade – even if it comes with the risk that any perceived leniency may be used against him.

In Europe hopes of a Brexit deal came back from the dead on news that PM Johnson would make material concessions around Northern Ireland. While an agreement remains some way off – and the end-of-October deadline looms large – the chances of a deal appear to have risen considerably.

We are mindful that sentiment on both issues can reverse in the time it takes to send a Tweet. But for the moment sentiment on the global macro has improved. This was reflected in bond yields. Australian government 10 years rose 13bps and are back above 1%. Their US equivalents rose 20bps to 1.73%.

Consensus market positions suggest apprehension. The crowded trades are all defensive: golds, bond, US dollar, and the defensive yield and growth sectors of the equity market. We are mindful that it won’t take much in terms of a sentimental improvement to spark a change in equity markets. 

Recent leading indicators suggest global demand remains weak, which is feeding through to commodities. Oil softened as higher inventories indicate weak demand – and the recent supply-side shock from Saudi has been swiftly shrugged off.

Iron ore remained flat for the week. Most see the price likely to fade towards the end of the year, with demand weak here too. We expect global policy makers to respond aggressively to soft growth. The Australian economy is in better shape than many in this regard given a relatively good fiscal position and a weaker currency. Recent tax and interest rate cuts are a signal of intent, but probably require a fiscal complement to succeed in avoiding a recession.

All sectors in the Australian market gained ground last week. Health Care (+3.1%) and Communication Services (+2.9%) were particularly strong. Real estate (+0.3%) and Consumer Discretionary (+0.4%) lagged while still making headway.

Banks gained +1.3%. The Big Four have all withheld roughly half of the recent rate cut, which is more than most expected. However news that the government has asked the ACCC to review competition and pricing in mortgages may make it harder for banks to withhold subsequent cuts. This compounds earnings pressure on the banks.

Flight Centre (FLT, -10.5%) was the worst performer in the ASX 100. Management conceded that near-term outlook remained soft and the recovery needed to meet guidance will be skewed to the back half of FY20.

AMP (AMP, -5.3%) also underperformed following the announcement of a restructure which will see the bank and wealth management arms merge.

Packager Orora (ORA, +9.4%) was the ASX 100’s best performer on the news it had sold its Australian and New Zealand cardboard box making business to Nippon Paper for $1.72 billion. This is not the first acquisition of Australian assets by large offshore entities with a low cost of capital we have seen in the last couple of years. It remains a trend to watch.

Waste manager Cleanaway (CWY, +7.4%) also outperformed following corporate action. In this instance, it was a $66m purchase of Victorian recycler SKM Group, which collapsed in early October. SKM held the contract to collect recyclables for 33 local councils but Chinese restrictions on recycling imports saw costs blow out and the company collapse. CWY’s purchase removes a competitor and consolidates the industry.   

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