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Weekly market update - 20th of January 2020

Written and accurate as at: Jan 20, 2020 Current Stats & Facts

It has been a strong start to the year for Australian equities as the S&P/ASX 300 price index hit all-time highs, up +1.95% last week and almost 6% for the year-to-date.

A raft of recent data points — coupled with the inking of a phase-one trade deal between the US and China — seems to have investors feeling more confident about the outlook for global growth.

US housing starts surged in December and came in well above consensus, benefiting from an easy base effect and unseasonably warm weather. US retail sales were better-than-expected, ex-autos.

Across the Pacific, China’s Q4 GDP grew 6% year-on-year and showed no sign of sequential deterioration. Annual growth came in at 6.1% — the slowest since 1990 — but defied some predictions of more significant slowing.

This more confident outlook is reflected in a continued rise in bond yields and commodity prices. Australian Government 10-year bonds are now back to 1.26%, rising 8bps over the week. US 10-year Treasuries are now yielding 1.83%. Meanwhile iron ore is up more than 3% for the year and 17% from its November lows. Copper is also rebounding.

Rio Tinto (RIO, +2.7%) provided a quarterly production update. Iron ore volumes were down slightly on the back of operational issues and the impact of weather, however this had been well-flagged at a recent investor day. Management expect 2020 iron ore production to be at least in line with 2019 — and up to 5% ahead.

Elsewhere, bauxite production came in better-than-expected, while copper was slightly disappointing. It was interesting to note RIO has taken a charge for the conversion of power supply for the Escondida copper mine in Chile from coal-fired to renewables. This is indicative of the company’s trend to reduce its carbon footprint, having already divested its coal assets. RIO also has a plan to convert the mine’s water requirements to 100% desalinated.

Whitehaven Coal (WHC, +2.0%) also delivered a quarterly update that confirmed December’s warning. Total coal sales were down 17% versus the same time last year. WHC’s mines have been hit by drought and weather events. They have also been slow to react to shortage in Fly-In Fly-Out labour, which has disrupted production. Investors are also showing some signs of wariness over the company’s plans for further expansion.

Nufarm (NUF, -10.2%) updated guidance for the half, flagging EBITDA was likely to be down 50% on the prior comparable period. The drought is having a major impact here too, but there is also an element of self-inflicted pain. The sale of its Latin American business to major shareholder Sumitomo has alleviated NUF’s balance sheet pressure. But as the best-performing asset in the stable, it does not help a muted earnings outlook.

Within the ASX 100 Virgin Money UK (VUK, -6.3%) was the worst performer, giving back some of the gains that came in the week of the Boris Johnson’s emphatic election win. Domino’s Pizza (-2.3%) weakened, as did Caltex Australia (CTX, -2.2%). The latter has allowed Canadian suitor Alimentation Couche-Tard access to the data room as part of its takeover bid, while also hinting there has been interest from players in purchasing segments of the business if they were to break themselves up. The stock is up 47.2% from its August lows, helped by the takeover interest.

The gold price continued to rise, notwithstanding some easing of geopolitical uncertainty and a rise in bond yields. Gold miners such as Evolution (EVN, +8.9%), Northern Star (NST, +8.1%) and Newcrest (NCM, +3.8%) were among the market’s best performers.

Elsewhere the midcap tech companies looked to recover some of their losses from late 2019, with Altium (ALU) up +7.5%, Afterpay (APT) +6.7% and Wisetech (WTC) +3.6%. Fortescue Mining (FMG, +6.6%) continued to surge on the back of stronger iron ore prices. There were also signs of QBE (QBE, +5.4%) closing up its valuation discount to the insurance sector, after having passed through a relatively benign US storm season.

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