Investment Week in Review - 10 July 2017

By Marcus Damen - July 10, 2017

Pitcher Partners' wrap up of issues impacting the markets over the last week.

 

News in Review

Australia

  • The reserve bank left the cash rate on hold at 1.5% for the twelfth consecutive month. Governor Philip Lowe explained that subdued growth in consumer spending linked to slow growth in real wages and high levels of household debt played a part in the decision. The RBA statement also made note of a property market that is showing signs of easing along with a desire to keep the exchange rate from appreciating.
  • A rebound in coal and LNG shipments boosted Australia’s trade surplus to $2.5 billion in May. The result was well ahead of forecasts and a significant increase on April’s surplus of $90 million, which was largely attributable to the effects of Cyclone Debbie in Queensland. The value of coal exports rose 62% to $5 billion and the value of LNG exports rose by 23% to $423 million. Forecasts of Australian exports could be affected going forward however due to falling iron ore prices.

US

  • U.S. Non-farm payrolls added 222,000 jobs in June, driven by hefty gains in healthcare, government, restaurants and professional and business services sectors.  The number was the second biggest payrolls increase this year and beat economists' expectations for a 179,000 rise.  The unemployment rate rose marginally to 4.4%, though this was due to more people looking for work, a sign of confidence in the job market.
  • Minutes from the Federal Reserve’s June committee meeting indicated a determination to continue raising rates despite stagnant inflation data. Underlying inflation (Personal Consumption Expenditure price index) dropped 0.1% in May for a 1.4% rise over the year (below the Fed’s target of 2%).  A plan was also outlined to reduce its $4.5 trillion balance sheet of bond holdings which it accrued while trying to stimulate the economy during and after the GFC, however no actual timetable was placed on when this would occur.

Europe

  • The European Union & Japan signed a free trade agreement to create the world’s biggest free trade zone. Currently the largest free trade zone relates to the North American Trade Agreement between Canada, the US and Mexico. The agreement between the EU & Japan joins together two economies that account for a third of global GDP. EU tariffs of up to 10% on Japanese cars will be phased out over seven years with most EU food exports having their tariffs eventually phased out as well. The treaty is likely come into effect around early 2019.

China

  • In a speech to the World Economic Forum in China, Prime Minister Li Keqiang noted that the world’s second largest economy is showing positive signs of structural reform. In his address, the PM explained that new economic forces such as e-business contributed to more than 70% of China’s employment in 2016 and discussed opening up China to increased foreign ownership, the benefits of globalisation and being conservative around macroeconomic policies.

Comment

While US jobs data for June was once again quite strong, it is still not driving the level of wages growth that would be expected for such a low rate of unemployment.  Rising wages drive consumption, which in turn means more jobs and a stronger economy.  Average hourly earnings in the U.S. are only rising at just 2.5% on an annualised basis, despite the unemployment rate only being at 4.4%.  Wages are the largest source of household income and the largest component of business costs and the low wages growth helps explain the lack of inflation.   Indications from central bank officials are that they believe the low inflation pressures to be temporary, though a continued lack of wage growth or a further delay or dialling-down of President Trump's pro-growth policies could change that perspective and cast doubts over the timing of the next rate hike, currently anticipated for December. 

The Week Ahead

  • US: Consumer Price Index (YoY) (JUN)
  • Australia: Westpac Consumer Confidence (JUL)
  • Europe: German Consumer Price Index (YoY) (JUN F)
  • UK: Jobless Claims Change (JUN)
  • China: Consumer Price Index (YoY) (JUN)

Company News

Shares in the Brisbane-based travel agency Flight Centre (FLT) reached a 15-month high after an improved performance in the past six months led to the upgrade of its earnings guidance. Flight Centre’s US business was on track for a second half profit and its Canadian business had grown significantly from a year ago. Sales volumes have also grown in Australian and New Zealand, and airfares are back in line with prior year’s prices, following “unprecedented discounting” during the first half of the financial year.

Ten Network’s (TEN) major investors – Lachlan Murdoch, Bruce Gordon and James Packer called in the receivers as expected to prepare the television station for sale of recapitalisation through a competitive tender. Operations in Ten will continue as usual while the sales process goes on. The administrators, KordaMentha, will continue to run the network but have commented earlier in the week that Ten’s cashflow was positive buy would need additional funding to keep operating while plans were made to keep the business afloat.

Bendigo and Adelaide Bank (BEN) announced that they will be raising rates on interest-only mortgages, following similar moves by major lenders. The regional launder will raise variable interest rates by 0.3% for its existing interest-only owner-occupier customers, and by 0.4% for its interest-only investors. The decision comes as the Reserve Bank held its benchmark interest rate at the record low of 1.5% for the eleventh straight month. Bendigo and Adelaide Bank is the latest of the major lenders to respond by encouraging interest-only customers to shift to other products with a rate hike.

Markets in Review

 

Capital Return

   
 

Weekly

CYTD

FYTD

S&P ASX 200

-0.3%

0.7%

-0.3%

DOW JONES

0.3%

8.4%

0.3%

S&P 500

0.1%

8.3%

0.1%

UK FTSE100

0.5%

2.9%

0.5%

FRENCH CAC40

0.5%

5.8%

0.5%

GERMAN DAX

0.5%

7.9%

0.5%

JAPANESE NIKKEI

-0.5%

4.3%

-0.5%

SHANGHAI COMPOSITE INDEX

0.8%

3.7%

0.8%

ASX200 Biggest Movers for the Week

$1 Australian buys you:

Security

LastPrice

AUDUSD

0.7600

AUDGBP

0.5897

AUDCNY

5.1710

AUDJPY

86.6505

AUDEUR

0.6666

AUDNZD

1.0449

ASX200 Sector Performance for the Week


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