Switzer on Saturday

Jobs down stocks up as trade tensions ease

Founder and Publisher of the Switzer Report
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The stock market ‘gift’ that keeps on giving (i.e. interest rate cuts) showed off its prowess overnight on Wall Street, with a lousy jobs report, where 75,000 jobs were created in May when economists had tipped 180,000. Sure, this might underline the lack of forecasting skill in US economists but it was the second time in four months that a sub-100,000 job creation number turned up.

The suggestion that these labour market numbers are telling us that the trade war effect on the US economy is slowing down economic growth and loosening the job market makes traders start thinking about an imminent interest rate cut. Of course, an economist like Fed boss Jerome Powell will at least wait one or two months to see if a significant downward trend is in place and how the trade war talks progress before opting for a rate cut.

Whatever, the market lapped up the bad jobs number and the Dow ended up 263 points (or 1.02%) to hit 25,983.94 and it was green on the screen for both the S&P 500 and Nasdaq indexes. The former was up 1.05%, while the latter rose 1.66%.

CME has a Fedwatch tool so now the chance of a rate cut next month has gone from 16.7% to 27.5% but that really says the reality is that a drop in the official Fed rate is some time off at this stage, which I think is a good thing for US and global growth and our growth here in Oz. In fact, Westpac is forecasting the Fed will cut rates twice before the year is out. “We have revised our federal funds rate profile to include two cuts of 25 basis points in September and December this year,” said chief economist Bill Evans.

Bill was the first to call rate cuts here and he was spot on!

I think two more months of President Trump playing ducks and drakes with China, Mexico, India and whoever could make the Fed move. However the news out this morning keeps up hoping that Mr Trump will secure a deal with China and his amigos south of the border down ‘Meccico-way’, as the old song goes.

Yep, Donald told us in another famous Trump-tweet that “If we are able to make the deal with Mexico, & there is a good chance that we will, they will begin purchasing Farm & Agricultural products at very high levels, starting immediately,” the big guy tweeted. “If we are unable to make the deal, Mexico will begin paying tariffs at the 5% level on Monday!”

Extraordinary stuff!

Meanwhile in Moscow, the Chinese leader Xi Jinping let the cat out of the bag that half of America might see Donald as public enemy number one but his trade adversary released the following to Reuters: “It’s hard to imagine a complete break of the United States from China or of China from the United States. We are not interested in this, and our American partners are not interested in this. President Trump is my friend and I am convinced he is also not interested in this.”

So if I was a betting man and high risk-taker (because I’m pretty fully invested in stocks then I guess I am), I’d say that says a trade deal will show up, eventually. If we weren’t used to politicians being a little unreliable, you could go chasing Chinese tech stocks that have been slugged lately. Tencent, which Charlie Aitken believes in and admitted going longer the stock yesterday in our webinar, is a case in point.

In mid April, Tencent was close to $US400 and now is $330.40 and I bet a trade deal will change the market’s attitude to the stock.

Source: finance.yahoo.com

Back home, it’s been a good week for stocks.

Mexico tariff talk and ongoing China trade escalations made Monday a bad day for stocks but we still saw the S&P/ASX 200 Index climb 47 points (or 0.7%) to finish at 6443.9. Of course, helping stocks was a seemingly worldwide commitment by central banks to cut interest rates, with our RBA actually doing it via a 0.25% drop in the cash rate, while its US and European counterparts made noises, suggesting a cut can’t be ruled out in 2019.

As we saw overnight on Wall Street, stock markets love rate cuts and hate rate rises. AMP Capital’s chief economist, Shane Oliver, has turned amateur psychiatrist with this interesting assessment of the latest chapter in Trumponomics.

“Trump may be thinking that it’s best to let the pain ramp up a bit to the point that the Fed eases several times and the Chinese give in to his demands, at which point he can negotiate a deal, share markets and economic data rebound in response and he is re-elected as a hero next year.

The risk for him is that China works out that he is thinking this and so digs in waiting for the trade war to weaken the US economy so Trump won’t get re-elected next year and they can try their luck with a more conventional president.”

(I miss my economic catch ups with Shane that I used to do on my Switzer TV program on Sky News Business, so I’ll get him on my new Switzer show that we’re filming in our own in-house studio. Here’s the link to this week’s show, which starred WAM’s legendary fund manager Geoff Wilson.

Stockswise, CBA rose to again see $80 and the other big four put on gains ranging from 1.5% to 2%, showing that market optimism, even with rate cuts, still helps bank share prices. That said, I’m a holder not a buyer of banks here only because I think other stocks have more upside and I’ll reveal those next week.

The star stocks of the week were Eclipx (up 17%), Wisetech Global (10.5% higher) and Abacus Property Group, which was up 9.9% after it joined Charter Hall to try a takeover bid for the Australian Unity Office Fund.

And if you’re wondering why a2 fell 7.1%, Bellamy’s 8.9% and others in this space copped it too, then blame China’s National Development and Reform Commission, which looks like it’s trying to KO foreign supply of infant formula. It’s why I’ve dodged a good company like a2. The Chinese are like volcanoes to airline profits – too hard to predict!

The shocker for the week was Vocus, after the Swedes pulled their offer and the stock plummeted 16.6%!

Finally, the SMH tells us that “Morgans retained its ‘Add’ rating on Afterpay Touch, following the ‘buy now pay later’ company’s update on Thursday.”

What I liked

  • The value of owner-occupier home loans rose by 1% in April, with investment loans down 2.2% to decade lows. (I didn’t like the last bit!)
  • In seasonally-adjusted terms, the share of first home buyers in the home lending market hit a near 7-year high of 28.2% in April.
  • The trade surplus fell from a downwardly-revised $4.89 billion in March (previously $4.95 billion) to $4.87 billion in April. Australia has recorded 16 successive monthly trade surpluses. The rolling annual surplus was a record $37.7 billion in the year to April.
  • Australia’s rolling annual trade surplus with China rose from $46.7 billion in March to a record $48.7 billion in April. Annual exports and imports are also at record highs with the country.
  • The ISM manufacturing index in the US fell from 52.8 to a 2½-year low of 52.1 in May (forecast 53). But orders, prices paid and employment rose. Construction spending was flat in April (forecast +0.4%).
  • The Johnson Redbook in the US posted a 5.8% increase in chain store sales for the week ending June 1 over the same week in the previous year.
  • The ECB President Mario Draghi refrained from providing as ‘dovish’ an outlook as hoped for by markets, but did say “looking ahead, the governing council is determined to act in case of adverse contingencies”.
  • US President Donald Trump met with UK business leaders and promised British Prime Minister Theresa May a “very substantial trade deal.” This could help the UK with its Brexit fallout.

What I didn’t like

  • The Australian economy grew by 0.4% in the March quarter (consensus: +0.5%) after growing by 0.2% in the December quarter. Annual economic growth fell from 2.3% to 1.8% (consensus: +1.8%) – the weakest rate since September 2009.
  • Retail trade fell by 0.1% (consensus: +0.2%) in April after a 0.3% increase in March and 0.8% lift in February. In trend terms, retail spending grew by 1.7% in New South Wales over the year to April – the weakest annual growth rate in seven years. I blame the election.
  • The Performance of Construction index from AiGroup fell 2.2 points to 40.4 points in May. Any reading below 50 indicates contraction in activity in the sector. It’s the ninth reading below 50 and steepest rate of decline in the sector in six years.
  • US factory orders fell by 0.8% (consensus: -1%) in April. The ISM New York Index fell by 28.7 points to 48.6 points in May.
  • The EU ruled that Italy had breached fiscal rules.
  • The Challenger job cuts in the US rose by 46% to 58,600 in May from 40,023 cuts announced in April.
  • Sources told Reuters the US Justice Department is preparing an investigation to determine if the Google-parent, Alphabet, broke antitrust laws. It sounds like a great idea but I don’t want another market curve ball in 2019. A trade war, Fed rate rise dramas, house price slumps, Royal Commissions, elections and Bill Shorten policies have all made investing in stocks bad for my hairline!

Spare a thought

Earlier this week, famous hedge fund manager, billionaire investor Stanley Druckenmiller told CNBC that he had gone to cash 100%! He could be made to look really silly but he also could be the canary in the coalmine. I don’t think the weight-challenged opera singer has got on stage yet to tell us the bull market is over but a short-term sell off could make Stanley look like the kind of person who gets described as a “billionaire.” We’ll see.

The week in review:

Top Stocks – how they fared:

The Week Ahead:

Monday June 10 – Queen’s Birthday Public Holiday
Tuesday June 11 – NAB business survey (May)
Wednesday June 12 – ANZ-Roy Morgan consumer confidence
Wednesday June 12 – Consumer confidence (June)
Wednesday June 12 – Overseas arrivals/departures (April)
Wednesday June 12 – Speeches by Reserve Bank officials
Wednesday June 12 – Credit/Debit card lending (April)
Thursday June 13 – Employment/unemployment (May)

Monday June 10 – China exports/imports (May, annual)
Monday June 10 – US JOLTs job openings (April)
Tuesday June 11 – US NFIB Small Business Optimism Index (May)
Tuesday June 11 – US Producer prices (May)
Wednesday June 12 – China Consumer/producer prices (May)
Wednesday June 12 – US Consumer prices (May)
Wednesday June 12 – US Monthly Budget Statement (May)
Thursday June 13 – US Import/export prices (May)
Friday June 14 – China monthly activity (May)
Friday June 14 – US Retail sales (May)
Friday June 14 – US Industrial production (May)
Friday June 14 – US Consumer confidence (June)

Food for thought:

“It’s one of the most important things at the end of the day; being able to say no to an investment.” – Henry Kravis 

Stocks shorted:

ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table shows how this has changed compared to the week before.

Chart of the week:

In his analysis of the Reserve Bank’s interest rate cut on Tuesday, AMP Capital’s Chief Economist Shane Oliver wrote that “the grossed-up yield on shares remains far superior to the yield on bank deposits” as can be seen in the chart below:

Source: RBA, Bloomberg, AMP Capital

Top 5 most clicked:

Recent Switzer Reports:

Monday 3 June: Trading around Donald, our portfolio review and 5 mid-caps

Thursday 6 June: Stocks that could do well from the RBA’s rate cut

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.