Weekly Market Wrap
Global markets edged higher this week, with the US markets reaching new record highs, while the European markets tested key medium-term pivot levels. Asian market held on to recent gains, trading around six year highs. The geopolitical crises in Europe abated with Russian and Ukrainian talks progressing and a negotiated peace has been reached over the Gaza Strip. The earnings season around the globe is virtually completed, so traders are on the lookout for the next catalyst to drive equity prices.
The central bankers and leading economists had their meeting in Jackson Hole, Wyoming Janet Yellen said the Fed will remain accommodative and that there is a concern over the ongoing slack in the US employment picture, while ECB President Mario Draghi identified that the eurozone economy is faltering and called for governments to do more to help the eurozone. Inflation is at five year lows and falling inflation is a drag on economic activity as companies, consumer and investors withdraw spending in anticipation of lower prices in the future.
The ASX 200 has found it difficult to push through the 5650 level, as the earning season and the dividend season continued. The miners and energy stocks are weighing on the markets, due to the surging US dollar which is having a detrimental effect on commodity prices. The crude oil price is at seven month lows around $US94, the iron ore price is at two year lows around $US88, the Gold price is still below the $US1300 level and the Copper price is pulling back to a key pivot level.
US stock markets are trading at record levels, consolidating recent gains but trading volumes remain at the lowest level for six years. The three benchmark indexes have risen in eleven of the past fifth teen sessions. The US market is benefiting from a flight to safety, on the back of optimism that central banks will remain accommodative and the economy continues to improve. The S&P500 hit a 30th record high closing above the 2000 level for the first time, but has eased back from this level now, the Nasdaq is easing back from fourteen year highs. The VIX has fallen 30% in the past month at 12.0. The Nasdaq Bio-tech index remained at its highest level on record and has now risen over 20% from its February lows. The US earnings season is complete with the S&P500 stocks, showing 7% on year growth. The economic news has been strong with US durable goods orders surged 23% in July the biggest gain on record, on the back of aircraft orders, while the Consumer Board consumer confidence index rose to 92.4 in August, the highest level since the start of the GFC and overnight US GDP expanded more than forecast, rising to 4% thanks to the biggest gains in business investment in over two years, while US existing home sales came in better than forecast for July. The US break for the Labor Day holiday next week.
European stock markets back away from one month highs, as traders moved to de-risk their portfolios as the tensions in the Ukraine escalated. Russian and Ukrainian talks had been progressing, but traders are cautious after reports that the ECB May not by introducing QE in its next September meeting. The Stoxx Europe 600 retraced -0.8% overnight, giving back half the gains from the earlier in the week, backing off its one month high. The index is still up nearly 6% from its five month low, hit in early August. The banking sector has provided support on the back of the speculation over the ECB asset buying program. Traders showed caution after reports that the ECB may not be introducing QE in its next September meeting and as German unemployment unexpectedly rose in August, running at 6.7% as the economy shrank last quarter. Eurozone inflation slowed to 0.3% in August, substantially below the 2% forecast. Later in the week we will see employment readings and economic confidence figures. The earnings season is complete so traders are looking for additional new catalysts to support the recent rises in stock prices and are looking to the ECB to address near-term deflation. The German market has given back nearly half of the 2.6% gains from earlier in the week, as unemployment figures disappointed, on top of a fall in German consumer confidence and troubles between Russia and the Ukraine continue to simmer. The London market has backed off seven week highs, as miners led the declines, the index is still up 4% from its August lows.
Asian stock markets declined this week, as the miners weighed. The MSCI Asia Pacific Index fell is still just over 1% below its six year highs. Across the region the mining companies weighed on the back of lower commodity prices. Equity valuations have reached their highs for the year, as traders bet on the accommodative stances from central banks will continue, but investors are profit taking near-term. The Chinese market is in a four session losing streak, despite Chinese industrials reporting profits rose 13.5% in July (down from 17.9% in June), rising at the best pace since last September. The index still up around 8% for the year and has rebounded 11% since the mid-March lows, on the hopes that the central bank will be prompted to add stimulus. There are ten companies that IPO’ed this week, which has the effect of draining liquidity from the equities market in the short-term. The Japanese market has retraced on the back of a higher yen and ahead of today’s inflation and industrial production for July. The Hong Kong market is holding below 25,000 again, after recording its biggest three session pullback in three weeks, but the index is still up 20% from its March low. Casino stocks have also weighed after Morgan Stanley downgraded revenue projections for Macau.
In today’s Analyst’s Eye article we show you how to can take advantage of these Short Covering Rally Opportunities, using limited risk, if you think that the buying is getting overextended, through the use of options. The earnings season has seen a number of short covering rallies; some examples include: Wesfarmers, Santos and Woodside, that have provided excellent trading opportunities.
The bulls have taken some profit off the table, but remained in control this week as the Aussie market held just below its six and a half year highs again. Trader sentiment has been supported by the solid earnings season as over 50 companies reporting in the week (see below for details). The index is trading at the upper level of its rising channel, but traders are becoming cautious around these levels.
The key pivot level short-term has been around 5650 and traders were looking to the Aussie earnings season for support for this rally, while keeping a close eye on the events overseas. The Aussie dollar is edging above the US93.5c recovering from its lowest level for two months. Key levels for the ASX200 index next week are around 5580 and 5660, with 5620 the key near term pivot level.
Some highlights of the earnings season so far include:
Adelaide Brighton says the restructuring of cement operations has contributed to its fall of -16% in half year profits; Boart Longyear the mining services company is considering selling out to private equity after suffering another annual loss; BC Iron the Pilbara miner recorded a 51% increase in profit amid strong sales; Boral reports net profit up nearly 200% and says housing market recoveries in Australia and the US should help in future; BlueScope Steel reported a worse-than-expected full year loss of $82.4 million, citing higher restructuring costs; Caltex will cut 350 jobs, as part of a restructure of the business, after it reported 1H14 net profit to $173 million; Flight Centre reported profit down 16%, but expects to grow its pre-tax profit 8% in the next year; Lend Lease reported profit up 50%, and says it wants to win more work overseas; M2 Group (providers of iPrimus and Dodo) raised annual profit 53% and expects growth of up to 20% in the year ahead; NIB the health insurer Health insurer expects further earnings growth this financial year after raising its profit 4%; Nine Entertainment warns times are still tough in television land.
Northern Star Australia’s second largest gold miner plans to triple its exploration budget to $50 million as competitors cut back spending; Pacific Brands the clothing maker is selling its workwear business after writedowns and weaker profit margins; Perpetual says stronger share markets and cost cutting have contributed to 34% growth in wealth manager’s annual profit; Prime Media the regional broadcaster says advertising conditions remain tough after achieving a small lift in annual revenue; Qantas has posted a record $2.8 billion loss but insists the airline is through the worst year in its 94-year history; Ramsay Health Care, Australia’s biggest private hospitals operator, says it has delivered its best financial results since listing on the Australian share market; Scentre Group the owner of Westfield’s Australian and NZ shopping centres raised its half year operating income by 2.3%. Spotless the property manager expects to achieve strong earnings growth in the year ahead after beating revenue and profit forecasts in FY14; United Group is expecting an improved outlook for its engineering business, after raising its full year profit more than 70%; Seven Group Kerry Stokes’ media and industrial services company has been hit by the mining downturn, causing a -46% drop in annual profit; Westfield Corporation the Shopping centre giant has raised operating income from its shopping centres around the world by more than five per cent in the first half of 2014; WorleyParsons’ the mining services company full year profit has fallen -23%, as it tries to improve margins.
Remain attuned to the news from overseas, particularly from the Eurozone (Geopolitics), China (IPOs/Stimulus) and the US (Shortened week). Monitor the US dollar for a guide to the future direction of commodities and equities prices.
Those investors that are looking to trade their directional view or are seeking some protection, or to reduce the volatility in their portfolio(s), can buy some insurance or options, or do some stock replacement, in order to either insure that they hold on to their recent gains and still get to participate in the next move, can still use options as the options volatility remains relatively low and warrants can be used to ramp up your dividend yields.
Contact me at D2MX Advisory on 1300 610 024 and we can help you trade, using a number of strategies that will give you the tools to navigate this market and help you improve your returns on investment.
Investment Adviser D2MX Advisory
This report was prepared by Michael Hevern. It represents the views and opinions of the author. It is not intended for use by any third party, without the approval of Michael Hevern. While this report is based on information from sources which are considered reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect my judgment at this date and are subject to change. Contracting Hevern Pty Ltd is a Corporate Authorised Representative No. 408868 of D2MX Pty Limited ABN 98 113 959 596, AFSL No. 297950 (D2MX), and Michael Hevern has been appointed as an Authorised Representative of Contracting Hevern Pty Ltd. Opinions, conclusions and other information expressed in this report are not given or endorsed by D2MX, unless otherwise indicated. The information contained in this Report is General Advice only, as the information or advice given does not take into account your particular objectives, financial situation or needs.
Disclaimer: Using leverage to invest can be a two edged sword, as it can magnify your returns when the stock price rises, but will in turn magnify the losses if the trade does not perform as expected.