What Happened Today?

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By Max Ludowici, Equities & Derivatives Advisor, 708 Capital

Was a fitting end to a pathetic and directionless week as we failed to regain any of the losses from yesterday’s sharp selloff despite a cracking night on the Street. We finished up a miserly 2.5 points to finish the week at 4460 points. A number of heated calls to fellow brokers across the country failed to reveal any clues as to the market’s weakness. Was definitely a day were one could not be blamed for knocking off at lunch to enjoy the beautiful weather in Sydney! This type of frustratingly weak and risk-averse price action has characterised our market for the past two weeks as investors mull over potential change in the world’s two biggest superpowers. Yesterday’s sharp selloff was blamed on a large portfolio sell that was pushed into the market over the course of the day, a remainder of this may be a cause for today’s sell down.

The cyclicals and bigger miners in particular put in a stellar performance over the day, massively outperforming defensives and preventing another finish in the red. BHP Billiton ((BHP)) closed up 60cents or 1.77% to $34.42. Likewise Rio Tinto ((RIO)) finished up $1.13 or 2% to $57.38. The financials appear to be rapidly falling out of favour as their weaker earnings results are finally coming to light. Westpac’s ((WBC)) result on Monday may prove to be a nail in the coffin for the whole sector. Investors are probably pre-empting a poor result given WBC’s close down 11c or 0.44% to $25.03.

We have been underweight the Banks for our clients for months now as we struggled to find value in the sector and noticed their P/E’s began drifting higher into the low-teens. We might have been early in making this call but the banks have had a stellar run over the past 6 months as Iron ore plummeted and everyone bailed out of the cyclicals and anything to do with the M word. Investors were looking for a home for their money and the attractive yield and seemingly stable earnings seemed like a logical play. However, a lower interest rate environment and their traditionally high exposure to domestic lending will mean the big 4 will find it increasingly difficult to maintain earnings as their interest margins are squeezed. Indeed each successive rate cut by the RBA is seeing less of this reduction passed down to debtors. ANZ appears to be the only bank who has been successful in trying to diversify their business away from domestic lending, NAB gave it a shot in Britain but the UK economy is cooked and not coming back any time soon. 

A majority of analysts are picking a further cut in the cash rate at Tuesday’s RBA Melbourne Cup day meeting as we continue to get signs pointing to a deterioration of our economy including a persistently high AUD (pushing above 1.04 again). I don’t think it’s as clear cut as that given the RBA has been known to often ignore macro factors when setting the cash rate which might ring true given last week’s CPI read of 1.4% for the quarter meant the annual underlying rate inflation rate was 2.5% and smack bang in the middle of the their target range. But if history is anything to go by then a cut is a pretty safe bet given the RBA has reduced rates in November for each of the past 6 years. 

Here’s to the weekend. 

 
This article produced at the request of and is published by FNArena with the expressed permission of 708 Capital.

708 Capital is a full service stockbroking and investment advisory firm. 708 offers investment and market advice to high-net-worth Private and Institutional clients in Australia and across the globe. 708's extensive network of contacts gives its clients exclusive access to ground-level fundraising opportunities and new company listings in a variety of small and large cap ASX listed companies. 708 has a longstanding track record of generating exceptional returns for its clients. Click here 708capital.com.au/contact-us/ for a no cost consultation and portfolio review or to learn more visit www.708capital.com.au. Note: 708 Capital offers wealth management services for Sophisticated and Wholesale Investors only. Unfortunately we cannot assist investors who aren’t classified as Sophisticated Investors or have verified assets over AUD$2.5m.

708capital is a holder of AFSL. No. 386279

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