The Monday Report – 16 December 2019

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This story features WESTPAC BANKING CORPORATION, and other companies.
For more info SHARE ANALYSIS: WBC
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Risk On

As the ASX200 finally hit a new post-GFC high in 2019 it has often been difficult to discern the mindset of investors, with defensive sectors very much a part of the rally and any given day providing a blurred mix of defensive versus cyclical and value versus growth, often spinning on a dime one session later. But what we can say about Friday’s trade is it looked text book “risk on”.

The combination of Johnson’s clear victory and a trade deal appearing to be across the line saw investors selling out of utilities (-0.5%), consumer staples (-0.8%), industrials (-0.3%) and healthcare (-0.3%) as the index managed to gain a net 0.5%.

The winners were IT (+1.5%), materials (+0.9%), despite gold miners being heavily sold, consumer discretionary (+0.5%) and most notably, financials (+1.4%).

The banks were buoyed by a 12 basis point jump in the Australian ten-year bond rate to 1.27%, and a leading 1.7% gain for Westpac ((WBC)) suggested investors now saw an all-clear with the AGM done and dusted.

UK-exposed stocks within financials had solid sessions, with Virgin Money UK ((VUK)), the artist formerly known as CYBG, rising 7.7% and Janus Henderson ((JHG)) 3.8%.

Another wealth manager, Pendal Group ((PDL)), jumped 8.1% following its AGM. The ASX200 leaders’ board was a mix of the usual high-volatility moves (biotech/lithium) alongside Pendal and rare earth miner Lynas Corp ((LYC)), which rose another 8.9% on the potential to work for Uncle Sam.

The losers’ board was a who’s who of gold miners, while we note that the bond proxies in industrials dragged down that sector, exacerbated by underwhelming dividend guidance from Sydney Airport ((SYD)), which fell -2.5%.

It was the off-loading of defensives which kept the index to a rather muted 0.5% gain when all around the region markets were very excited about the trade deal. The Shanghai index rose 1.8% and the Hang Seng and Nikkei each rose 2.6%.

But was it also a rally tinged by a bit of scepticism? As the market opened President Trump had still not signed off, although he subsequently has, and the deal still has to be officially signed by both parties, which has proven somewhat of a stumbling block in the past.

And is it really much of a deal?

The answer to that question, from the Australian perspective, may lie in the fact Wall Street closed flat on Friday night yet our futures closed up 39 points. It’s as if a little more confirmation was needed.

So, tick them off: Fed, Brexit, trade. While we can hardly say we’ve entered some Brave New World as of this morning we certainly can say, as we enter the final full week before Christmas and attention starts to sway towards prawns and sun cream, there’s not much to drive a traditional Santa Rally. We’ve already done that really. But we do still remain around 150 points short of the all-time high posted in early December.

So maybe that will be the present from Santa this year.

And for the record, a true “Santa Rally” occurs between Christmas and New Year.

Now what?

There’s a bit in there about intellectual property, technology transfer, financial services and currency but realistically “phase one” involves China buying a lot of US stuff, mostly soybeans and pork. In return the US$150bn tranche of new new tariffs set for yesterday will be delayed, while the US$120bn tranche from September will see a tariff cut to 7.5%.

Wall Street agrees it’s not much of a deal, even if it’s only phase one, but the critical element was those December tariffs and they’re gone for now. A rollback of existing tariffs was also anticipated, and modestly delivered.

Wall Street had been building up to such a result all week, and got it. US stock indices leapt from the open on Friday night (Dow up 158), hit a wall of “sell the fact” (Dow down -104) and finally settled flat. Traders had pinned their hopes on a neutral Fed, a Johnson victory and an actual trade deal, however light on, and that is what has transpired. No need to get excited further.

The trade deal is due to be signed sometime next month, which in itself still suggests a risk – not like we haven’t been here before – but it will be signed at the ministerial level rather than presidential level, which is more encouraging. It’s a lot easier to get a couple of ministers together.

Ongoing risk comes in the form of this being only “phase one”. Note that the December tariffs have only been delayed, not binned, and while tariffs on US$120bn of goods have dropped to 7.5% from 15%, a 25% tariff on US$250bn of goods remains for now.

China now has to comply with phase one. If there is no evidence of such, and there never has been before, then it will be back to the start – more and higher tariffs.

So next year we’ll do it all again. What fun.

Meanwhile, all faith is being placed in the US consumer in the final run-down to Christmas. So it didn’t help that US retail sales in November rose only 0.2% when 0.5% was forecast.

However there has been much talk of how Thanksgiving was as late as it could be this year, falling on the 28^th, which meant, aside from anything else, that Cyber Monday was in December this year. So the market is pinning its hopes on there being a pull-through to December data compared with past years to even the score.

We might nevertheless note that, while US equities saw somewhat of a “sell the fact”, US bonds had quite a “buy the fact” session. The ten-year yield fell -8 basis points to 1.82%. That’s very “risk off” in isolation.

So no one is anticipating a doddle of a 2020.

Oh and by the way, Trump is now considering a 100% tariff on European whisky and cognac.

Commodities

The drop in US yields meant gold still has some life left in it, post trade deal.

The oils responded as one might expect but it was mixed among the metals.

The Aussie continues to track the greenback, rather than oppose as it should, so both are down -0.2%, with the Aussie at US$0.6893.

The SPI Overnight closed up 39 points or 0.6%.

The Week Ahead

China releases November numbers for industrial production, retail sales and fixed asset investment today.

The Banks of Japan and England both hold policy meetings on Thursday. The BoJ will be concerned in the wake of the Japanese quarterly Tankan survey – state of the economy – which was very weak.

The BoE will finally be able to get down to business, one presumes.

Flash December manufacturing PMIs for Japan, the eurozone and US are due today/night.

The US will also see housing sentiment tonight, housing starts and industrial production tomorrow, and consumer sentiment and PCE inflation on Friday, along with another revision of September quarter GDP.

Locally, the minutes of this month’s RBA meeting are due tomorrow along with housing finance data, and on Thursday it’s the November jobs report.

Thursday is also the December quarter expiry of all ASX derivatives – SPI futures, SPI options, ASX index options and stock options – which can lead to otherwise inexplicable volatility.

On Friday the changes to the ASX20 through 200 indices announced last Friday become effective.

Woolworths ((WOW)) holds its AGM today, followed by ANZ Bank ((ANZ)) and Orica ((ORI)) tomorrow, National Bank ((NAB)) on Wednesday and Incitec Pivot ((IPL)) on Friday.

The Australian share market over the past thirty days…

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