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Weekly market update - 1st of June 2020

Written and accurate as at: Jun 01, 2020 Current Stats & Facts

Australian equities gained a whopping 5% last week and broke out of a recent sideways trading pattern.  There is a paradox in such strength.  We have the fundamental economics from Covid19 yet to play,  heightened tensions over Hong Kong and rioting in some US cities. 

The week also saw an unusually sharp rotation to value, reflecting broader market strength.




While it remains early days, we are seeing some US states continue to roll back restrictions without a meaningful tick up in virus cases.

Demand continues to be stronger than most expected. The US government has disbursed almost US$900 billion since the first week of March. This has pushed up personal incomes (we have seen a similar effect here in Australia) and compensated for job losses. We have seen a spike in the savings rate, which many are expecting will feed through to a surge in activity from pent-up demand.

The debate remains: do we get to an endpoint of 90-95% of previous capacity – but perhaps faster than first thought – or do we get to a higher endpoint than initially expected? The weekly disbursement has been falling since early May – and the question over whether programs are tapering too quickly is another key area of debate. The answer to both questions will lie in data points over the coming weeks and months.

At this point data on housing and auto production is positive. Continuing claims data is also encouraging, having fallen by four million. This indicates some people who have lost jobs are now being rehired.

We stress this is all early days. Initial signs are encouraging – but the material risk remains in place.

We continue to watch the US 10-year bond yield as an important indicator. It has been flat and stable for several weeks despite weak economic data, suggesting the market is optimistic on the scale of policy response and speed of re-opening. At this point, the risk of a near-term fall in yields is diminished, although the scale of Fed buying is also likely to cap any scope of a material rise.


The Fed has suggested it will undertake another phase of policy – perhaps yield curve control or further asset purchases – but it is willing to hold off for 2-3 months to see how the economic picture develops. The 2-year yields indicate the market is confident the current policy approach may be sufficient.

The EU announced a EUR500bn recovery fund. It was significant in its scale and its terms, which don’t require repayments until 2028 (with the possibility of potential deferment) and its targeting of weaker southern regions. The ECB meets this week and is expected to increase its bond purchase program.

Japan announced an additional stimulus package equivalent to 6% of GDP.

The key point is that the tide of policy support remains strong and is underpinning current market confidence, allowing investors to look through the terrible near-term economic data.


Several positive technical aspects emerged in equity markets last week. 95% of US stocks are now trading above their 50-day moving averages – a rare signal (only 28 times in 50 years) that is usually bullish for markets after a period of consolidation. At the same time, surveys suggest there are net flows out of ETFs and funds – investors are defensively positioned for the most part. Again, this is not typical positioning ahead of a material correction.

After a period in which a small cohort of stocks – mainly growth – were driving the rebound, last week saw a rotation to value which reflected a broadening of market strength. The speed and scale of this rotation are among the strongest seen historically. While there has been debate over the market’s ability to retest the March lows, some value sectors have been hovering just above the lows for the last couple of months. However last week saw several participate in the market’s bounce. Australian banks were a case in point, up +12.9% for the week.

The Australian market as a whole broke out of the consolidation range of the last month and could continue to grind higher if we keep re-opening without an increase in viral infections.

Geopolitics continues to present a risk factor – one which the market has shrugged off thus far. US-China rhetoric is unlikely to mellow ahead of the Presidential election. However, it’s notable that Trump’s Friday speech did not ratchet up tariffs. Any sanctions in response to Beijing’s approach to Hong Kong are likely to be long-dated. The White House is unlikely to do anything to drag on an economic recovery in an election year.

Gold was flat for the week. Copper was up a little and showed signs of having troughed after material falls. Iron ore was up 9% as Brazil continued to see Covid-19 cases balloon, disrupting supply from Vale.

Sector moves reflected the rotation to cyclical, value and stocks which have been most affected by the economic hits of the last few months.

Health care underperformed, down -2.4%. Metals & Mining (+1.0%) also lagged the index. In contrast, Banks gained +12.9%. The Big Four are only 17% of the index these days, but this was still enough to help drive index gains. Elsewhere REITs gained +5.9%, Energy +4.7%, and Discretionary +4.3%.


Only nine stocks in the ASX 100 went backwards last week. Energy contractor Worley (WOR, -7.2%) continued to bounce around and was the worst performer in the ASX 100 (it was the best performer the previous week).

CSL (CSL, -5.1%) fell as the market expressed concern over plasma supply. There is some evidence US government handouts have demotivated people to supply blood. Social distancing requirements have also disrupted clinic operations. There is likely to be a 6-9 month lag before this affects plasma supply for CSL and there are several factors that could mitigate the impact. However given the risk — and the fact that it is the largest stock in the index with strong outperformance over the year-to-date – CSL was a natural funding source for the rotation to banks. ResMed (RMD, -1.9%) also fell in the health care space.

Otherwise, the main laggards were a mixed bag. Gold miners generally underperformed, although Newcrest (NCM, -2.8%) was the only large-cap gold miner to go backwards. Utility AusNet (AST, -0.9%), Wisetech (WTC, -0.6%), Scentre Group (SCG, -0.5%), Alumina (AWC, -0.3%) and copper miner Oz Minerals (OZL, -0.2%) were the only other stocks in the ASX 100 to fall.

Virgin Money UK (VUK, +23.2%) was the best performer in the ASX 100, despite a 9% fall on Friday. Covid-19 has pushed Brexit from the front pages, however, June looms as an important month with negotiations likely to signal whether the UK will seek an extension to the deadline. This is likely to see further volatility for UK-sensitive stocks such as VUK.

Strong gains in Boral (BLD, +21.0%) – a highly geared cyclical – typified the rotation in last week’s market. Stockland (SGP, +16.3%) was up on better sentiment around the Australian economy.

Flight Centre (FLT, +15.9%) was among the strongest even as international travel looks likely to remain restricted for some time. Qantas (QAN, +10.8%) also made good gains. 

ANZ (ANZ, +17.5%) was the best performing of the banks, followed by National Australia BANK (NAB, +16.1%) and Westpac (WBC, +14.7%). Commonwealth Bank (CBA, +8.6%) was already trading at a premium to its peers.

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