Pitcher Partners' wrap up of issues impacting the markets over the last week.
News in Review
US President Trump and China’s President Xi Jinping met for a two day summit and agreed to develop a 100 day plan to address trade issues.
Trump launched military action against Syria with a strike on the airfield which was used to launch the chemical attack which killed more than 70 people.
The minutes of the US Federal Reserve Meeting showed that most members believe that focus should be placed on reducing the US$4.5 trillion balance sheet later this year, in an effort to normalise monetary policy.
The US Unemployment Rate improved to its lowest level in a decade at 4.5%, with 98,000 jobs added during the month of March. The US economy is now considered to be ‘full employment’ levels with any reading below 5% indicating full employment.
APRA, the regulator of our Australia banks has warned that focus will be placed on the heavy exposure to the housing market, and stated they would like our banks to be in an ‘unquestionably strong’ positon. The regulator placed a new limit on interest-only loans, with the limit likely to result in higher borrowing costs again for those with these types of loans.
Job ads in Australia were up 7& this year, with internet related jobs accounting for about 90% of that increase. Job ads should result in stronger employment, which will be closely watched when numbers are released next week.
Australia’s trade balance in February has lifted to $3.57 billion following $1.50 billion in January. The rise came on the back of a $469 million rise in goods and services exports and a $352 million rise in gold exports.
As largely expected by the market, the Reserve Bank of Australia has decided to leave cash rate unchanged at 1.5% for the seventh month in a row.
Europe & the UK
European Central Bank President Mario Draghi, addressed the media during the week stating his confidence in the current fiscal policy. The Bank will continue its policy of stimulus until they are sufficiently confident the economy can stand on its own feet.
In signs of economic health in Germany, manufacturing orders increased by 3.5% during February in seasonally adjusted terms. The previous two months results were -6.8% in February and 5.2% in January.
North Korea launched a ballistic missile into the waters off its east coast. In the meeting between Trump and Xi Jinping, they agreed that action must be taken regarding North Korea.
While this past week included some important economic updates including US unemployment levels and the RBA’s Monthly Meeting, geopolitical and international conflict issues took centre stage. These issues, while not directly related to the markets, could impact sentiment over the coming weeks.
The conflict between the US and Syria, with the added worry of Russia, could escalate. There is the potential for unpleasant results in North Korea after the US positioned aircraft close to the areas of the missile launches. These worries all come at a time of high market valuations based on confidence in Trump’s ability to deliver on pro-growth election promises which so far have not materialised.
Here in Australia, we also must consider the upcoming May budget and constant talk around the highly valued property market.
These sorts of risks would usually impact markets and valuations, but for the moment it seems the market is taking these worries in its stride. We are watching these developments with some caution.
The Week Ahead
US: Core CPI, Core Retail Sales
Australia: Unemployment Rate
Europe: German Economic Sentiment
UK: CPI , Average Earnings Index
China: Trade Balance
IAG announced that Cyclone Debbie would cost the insurer $140 million and the company has now reached its maximum event retention, meaning any further disasters will likely have to be covered by re-insurance.
The Reject Shop (TRS) shares have plummeted after the discount variety store chain warned its full-year profit will drop by almost a third. The Reject Shop said the weak trading conditions had continued across its stores in all states and it now is expected to report a full-year profit of about $12.5 million, compared with $17.1 million in 2015-2016. The company also warned that it might not be able to declare a final dividend in 2016-2017.
Global retail giant Westfield (WFD) plans to gain a foothold in the US and UK housing markets through new apartment assets adjoining some shopping centres. The chairman of Westfield, Mr Lowy, said that the group will continue to focus on what it calls its flagship portfolio – key malls across the US – and sell down properties considered second tier for Westfield. In executing the flagship asset strategy since 2010, Westfield have divested 29 secondary centres in the US and UK, with a total value of $7 billion. It has also joint ventured 22 assets, raising $4.6 billion of additional capital.
JB Hi-Fi’s (JBH) former chief executive, Terry Smart, will return to the group to replace the long-running boss of recently acquired whitegoods business The Good Guys. Mr Smart was JB Hi-Fi’s chief executive from 2010 to 2014. JB Hi-Fi has also moved to reassure investors that both its businesses are trading strongly. The company has also reaffirmed its guidance for group sales of about $5.58 billion for its 2017 financial year – JB Hi-Fi contributing $4.33 billion and The Good Guys $1.25 billion. It also still expected the group underlying net profit to be in the range of $200 million to $206 million.