The Monday Report

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This story features BAPCOR LIMITED.
For more info SHARE ANALYSIS: BAP
The company is included in ASX300 and ALL-ORDS

By Greg Peel

The upshot of Trump and Xi’s “trade truce”, agreed to on Saturday, is that Trump’s final US$300bn tranche of tariffs is on hold “for the time being”. Trump has also lifted his ban on selling products to Huawei.

Or has he?

On the trade front, Trump and Xi also agreed to a “trade truce” at the previous G20 meeting in Argentina in December last year. Not only has there been no progress since, that lack of progress led to Trump implementing his threatened existing tariff increase to 25% from 10%.

On the matter of Huawei, pressure from US tech companies was reportedly behind Trump’s decision to “lift” the ban, but only on components that don’t threaten US national security. Given US politicians see Huawei in general as a threat to national security, how exactly does one work out which components are or are not a threat?

The biggest losers from the Huawei ban have been the US chip-makers – supply upon which Huawei depends. They were heavily sold down in May after the tariff increase and Huawei ban and while having recovered a lot of that lost ground in June, are still a long way from their previous highs. Will the weekend’s developments send chip stocks soaring back tonight?

It’s a bit hard to tell.

In terms of Wall Street in general, the G20 outcome is basically what had been priced in by Friday, Huawei notwithstanding. The Dow posted its best June in 80 years. While the outcome means Wall Street will not tonight fall into a hole, how much upside does it suggest?

And if further tariffs are on hold, does that mean the Fed will also remain on hold, for the time being?

In other news, China manufacturing and services PMIs remained rather conveniently stable in June, at 49.4 and 54.2 respectively.

For what it’s worth I

There was no end of quarter window dressing evident on the ASX on Friday. Or if there was, it was steamrolled. Rather we saw EOFY profit-taking, most notable in the materials sector, which fell -1.5% despite another overnight increase in the iron ore price.

Energy (-1.7%) was similarly dealt with.

The banks put up a good fight before closing less than -0.1% lower. Data showed housing credit rose 0.2% in May. However, this represents a slowing of growth from April to a new low growth rate. Investor growth remains flat.

Business credit grew by 0.1% but personal credit fell -0.6%. Consumers are leaving the plastic at home. Business credit is expected to weaken into the new financial year, thus it will require a rebound in housing credit demand to offset that trend. Economists expect housing credit demand to pick back up on the back of RBA rate cuts and regulatory easing, along with the election win implications.

Other sectors were all down on Friday, which is of no great surprise after a month which finally took the ASX200 to a new post-GFC high, and even within sight of a new all-time high.

On the individual stock front, ASX200 winner on the day was Pact Group ((PGH)), up another 9.8% in a repeat performance of Thursday, after the company announced a successful refinancing.

Loser was Afterpay Touch ((APT)), down -9.9% on news Visa is planning to enter the buy-now-pay-later market.

For what it’s worth II

Wall Street closed with a flourish on Friday night, but the bulk of the buying materialised in the last 15 minutes. Looks like the end of quarter window dressers outplayed the profit-takers.

However, the bulk of last minute volume was attributable to the annual rebalancing of the Russell indices, which saw Russell 2000 small cap leaders being promoted to the Russell 1000 large cap index, and recent IPO stocks also being added, such as Uber.

The financial sector was otherwise the winner on the day, as all of the “too big to fail” banks passed their annual “stress tests” and had their capital return policies approved by the Fed. The US banks have underperformed in general in 2019, with the prospect of Fed rate cuts ahead proving a drag.

Goldman Sachs led the charge, after receiving approval for a 50% dividend increase.

Data showed US consumer spending increased by 0.4% in May, beating 0.3% expectations. But PCE inflation fell to 1.5% from 1.6% in April, which does nothing to temper expectations of a Fed rate cut.

A “trade truce”, rather than a resolution or escalation, makes such a decision even more tricky for the central bank.

Commodities

Not a lot to see here ahead of the G20, except for oil prices, which pulled back a bit having booked a 9% increase for the month.

The Aussie is pushing relentlessly higher, up another 0.4% to US$0.7032 on a -0.1% fall in the greenback. It just can’t seem to hang on in the sixties. A higher Aussie will only further frustrate the RBA.

The SPI Overnight closed up 18 points on Saturday morning, suggesting a positive start for FY20, albeit ahead of the G20 news.

The Week Ahead

Did the world change on the weekend? Not particularly.

Having postponed their meeting until after the G20, OPEC members begin a two-day production meeting tonight in Vienna.

Today brings global manufacturing PMI results for June and Wednesday it’s services PMIs.

The US will see numbers for factory orders and trade on Wednesday, along with private sector jobs. Friday it’s non-farm payrolls, which are very much back in the frame with regard Fed policy.

In Australia we’ll see house prices today, building approvals on Wednesday and retail sales on Thursday. The RBA meets tomorrow. Back to back?

In a week otherwise devoid of scheduled corporate events, Bapcor ((BAP)) hosts an investor day on Wednesday.

The Australian share market over the past thirty days…

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