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Weekly market update - 16th of December 2019

Written and accurate as at: Dec 16, 2019 Current Stats & Facts

The de-escalation of two global macro uncertainties helped drive the local market finish approximately 0.5% last week.

First it was reported the US and China had agreed in principle to an initial trade deal. Investors have been contemplating three possible outcomes on trade:

  1. No deal – a deteriorating relationship and further tariffs;
  2. Stagnation of the current situation, with no escalation but no resolution; or
  3. A reasonably robust phase-one trade deal

While short on detail, most agree the outcome lies somewhere between scenarios two and three. While it does remove the risk of the additional tariffs which were slated for December 15, it also leaves the first two rounds of tariffs in place and only reduces the third round from 15% to 7.5%. China, in response, has agreed to buy additional US products – including agricultural produce, which will play well to key constituencies ahead of the US Presidential election. Meanwhile, it does little to address the structural challenges in the strategic relationship between China and the US.

The second development was the emphatic Tory win in the UK elections, providing PM Johnson with the mandate to leave the European Union. This is important for several UK-sensitive stocks on the Australian bourse, as well as reducing some of the broader macro uncertainty.

The combined outcome means the degree of risk to markets from trade and Brexit has fallen for the moment. But it is unlikely to fuel a further surge.

Nevertheless, it did prompt a risk-on rotation within the markets. Gold stocks were among the worst performers in the S&P/ASX 100, with Evolution (EVN) down -9.3% and Newcrest (NCM) -5.0%.

Defensive yield stocks underperformed. The REITs sector was down -3.9%, led by Mirvac (MGR, -6.6%), Stockland (SGP, -6.0%) and GPT Group (GPT, -5.8%). Sydney Airport (SYD) also fell -4.9%. Some of the bond-sensitive growth stocks also fell: Wisetech (WTC) was down -6.7% and Afterpay Touch (APT) -4.0%. Australian 10-year government bonds yields rose 13bps to 1.26%, although their American equivalents were virtually unchanged, ending the week at 1.82%.

Reduced risk-on trade fed through to a better week for resources. South32 (S32, +13.4%) was the best performer on the ASX 100, helped by stronger manganese prices due to talk of supply reductions in response to weaker prices over recent months. Manganese sales were just over 18% of S32’s revenue in FY19. The iron ore majors – Fortescue Mining (FMG, +8.2%), BHP (BHP, +5.3%) and Rio Tinto (RIO, +5.0%) – were also among the week’s best. Strong gains in Alumina (AWC, +7.2%), OZ Minerals (OZL, +6.5%) – which mines copper, and Whitehaven Coal (WHC +4.6%) demonstrate the breadth of the rally in resources.

We also saw good gains in stocks with some leverage to the UK. Virgin Money UK (VUK, +12.5%) – previously CYBG – did well, as did Reliance Worldwide (RWC, +6.1%), QBE Insurance (QBE, +5.6%) and Link Administration (LNK, +5.6%).

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