The Monday Report – 25 May 2020

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

By Greg Peel

Hong Kong Swansong

The ASX200 opened slightly higher on Friday but within half an hour began to track a steady path downwards, to not quite close on its lows. The futures had suggested down -7 points and the index closed down -53.

The main driver of weakness was Hong Kong market-watching. The Hang Seng was down -4.8% as the ASX200 closed and ultimately fell -5.6%. China’s proposed new security laws have not only rekindled pro-democracy protests, with some help from lockdown-lifting, but this time have led the world into believing it is the beginning of the end for the one state-two system policy.

It has been noted that when Hong Kong was handed back to China by the British in 1997, Hong Kong represented 18% of China’s GDP. Now, that’s down to 2%. The point being were the global financial industry to abandon Hong Kong, Beijing would not be bothered. It was also noted that the new laws announced at the annual National People’s Congress will also take in Macau (casinos are banned in the mainland), and mention was yet again made of the reunification of Taiwan.

Only this time, the word “peaceful” was omitted.

This move from Beijing only adds to the tension already existing with Australia, on the unrelated topic of a virus investigation. Washington is not going to stand idly by and ignore the end of democracy, to the extent that it is, in Hong Kong. US financial institutions have much invested in the island.

In other news, ratings agency Fitch has gone to “negative outlook” on Australia’s AAA rating, making us the only country on negative in an elite group of AAA rated economies, inclusive of Canada, Singapore, Germany, Netherlands, Switzerland, Luxembourg and the Scandies. Fitch is nonetheless only one of three relevant agencies.

Our ten-year bond yield is down to 0.91% and the Aussie has fallen -0.5% to US$0.6534.

The IT sector closed dead flat on Friday but all other sectors fell on the day. After a solid rebound, energy was the worst performer on -2.2%, with materials chiming in on -0.7%.

Healthcare fell -2.0%, likely because when the mood turns sour across the market, investors move to lock in their CSL ((CSL)) profits. CSL fell -2.4%.

There was still some support for the reopening theme, with consumer discretionary falling only -0.4% to staples’ -1.2%, industrials falling -0.3% and utilities -0.5%. The banks fell -0.9% to weigh heavily on the index.

The same theme was evident among individual stocks. Smartgroup Corp ((SIQ)), which is engaged in employee management and salary packaging, topped the index with a 9.6% gain. Also among the top five winners were Corporate Travel Management ((CTD)) and IDP Education ((IEL)). Lynas Corp ((LYC)) was strong again on the China theme.

Outside the index, Myer ((MYR)) rose 7.4% and HT&E ((HT1)) 15.3%.

Among the losers, NRW Holdings ((NRW)) topped with a -9.4% pullback following its 30% pop on Thursday, while UR Westfield ((URW)) fell -6.9%. The retail landlord should be a winner on the reopening theme, but investors are worried about its debt situation.

Just when you thought the rebound rally was going to fall apart thanks to China, the futures closed up 65 points or 1.2% on Saturday morning despite the S&P500 rising a mere 0.2% on Friday night. Presumably traders had been expecting a more dramatic response on Wall Street but it didn’t eventuate.

It’s Almost Summer

The Hong Kong situation was not lost on Wall Street, and indeed the indices all opened lower on Friday night. But other matters balanced out the weakness to ensure a flat close ahead of the long weekend.

The US, like most countries, sensibly marks the beginning of summer on the June 21 solstice. However the Memorial Day long weekend is seen as the curtain raiser and with all fifty states now in the process of reopening, this year’s holiday will be economically a more successful one than might have been previously feared.

It will also be a test case, one presumes, on how well Americans can behave themselves. President Trump declared on Friday night that there will not be another lockdown even if there is a second wave.

Dr Fauci had been an early critic of the too-fast re-openings, but conceded on Friday night that aside from the economic perspective, keeping people in lockdown for too long could result in health issues that exceed the threat of the virus. He thus supports the gradual reopening push.

Fauci also remains confident that a vaccine can be found this year, which puts him at odds with most medical experts.

So for Wall Street, Friday night was a case of balancing out the positives and the negatives, and no doubt looking forward to finally getting out and about for a bit of a break.

Commodities

Metals prices are showing a greater concern about geopolitical tensions, while gold is also a reflection.

The oils, too, look concerned, but then after rallying back so hard, pullbacks are no surprise.

Strength in the US dollar index (+0.4%) would also have had an impact.

Note that tonight is also a holiday in the UK, thus the LME will also be closed.

The Week Ahead

Australia will see March quarter construction work done on Wednesday and private sector capex numbers on Thursday in the lead-up to next week’s GDP result, all of which is increasingly irrelevant.

At least it’s the ABS, not the government, who does the maths.

The US will see more up to date data for consumer confidence tomorrow night, durable goods orders on Thursday and retail sales and PCE inflation on Friday. The Fed’s Beige Book is out on Wednesday.

China will report May manufacturing and services PMIs this weekend.

Select Harvests ((SHV)) will report earnings today and ALS Ltd ((ALQ)) tomorrow.

AMA Group ((AMA)) and Spark Infrastructure ((SKI)) hold AGMs tomorrow and Appen ((APX)) and Costa Group ((CGC)) on Friday.

Brambles ((BXB)) hosts a series of investor days, beginning tomorrow.

The Australian share market over the past thirty days…

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

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