Investment Week in Review - 31 July 2017

By George van Deventer - July 31, 2017

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

Comment

Despite the annual Australian inflation rate falling below the RBA’s 2-3% target range, last week the Aussie dollar rallied past 80 US cents to levels not seen since May 2015. The fall in inflation was due to falling prices in seasonally available fruits, domestic travel, fuel (due to the falling oil price) and clothing price cuts (due to increasing competition amongst retailers). This would typically have a negative effect on the Australian dollar, however not half a day after our inflation numbers were announced, the US Federal Reserve released their monetary policy statement, which caused the US dollar to fall and lead to a higher Australian dollar.

While it was no surprise that the Fed held their interest rate policy unchanged (between 1% to 1.25%), the US dollar fell because the market interpreted a more pessimistic outlook on inflation by the Fed. Some argue that the market response was an overreaction given the Fed also said that it would start winding back its huge balance sheet “relatively soon”, something which should only be done if the Fed is confident the economy is strong enough to absorb the stimulus reversal.

News in Review

Australia

  • Australia’s headline inflation rate rose by 0.2% for the June quarter according to figures released by the Australian Bureau of Statistics (ABS). On an annualised basis, this translates to a 1.9% increase for the year to 30 June 2017. The ABS noted that the most significant price rises for the quarter were medical and hospital services (+4.1%), new housing costs for owner-occupiers (+0.9%), tobacco (+1.0%) and beer (+1.0%), while the most significant price falls were domestic travel and accommodation (-3.2%), automotive fuel (-2.5%) and fruit (-4.4%).

US

  • The US Federal Reserve have left rates on hold this week in the range of 1% to 1.25% sighting the need to monitor slowing inflation which continues to move further below their target of 2%. Despite this, and in a sign of confidence in the economy through solid job gains and expanding house hold spending, the Fed has reiterated its plans to start unwinding their $4.5 trillion balance sheet.
  • U.S. gross domestic product increased 2.6% in the second quarter, meeting expectations but still below the long-term historical average of 3.1% and what President Trump had campaigned on. 

UK/Europe

  • The UK economy continued to increase at a slow pace with second quarter GDP edging higher at just 0.3%, with annualised growth at 1.7%. The economy has been slowing since the beginning of the year following the Brexit referendum which has brought about predictions of a recession. Inflation nearing four year highs is also providing increased pressure on the economy with consumer prices rising 2.6% in the year to 30 June 2017.
  • Spain’s unemployment rate fell to its lowest level since the Global Financial Crisis. In the second quarter of the 2017 calendar year, its unemployment rate fell 1.5% to 17.2%, which remains the second highest in Europe after Greece. The decrease was mainly driven by the service sector which increased its hiring of people for the summer period.

China

  • The International Monetary Fund released updated global growth figures in the latest quarterly update to its World Economic Outlook. Their projections show that China should grow by 6.7% in 2017 and 6.4% in 2018, with the 2018 figure being revised up 0.2% from the April forecast. In contrast, the IMF has forecasted US growth to be 2.1% for 2017 and 2018 which is down on its April estimates of 2.3% and 2.5% respectively.

The Week Ahead

  • Australia: RBA cash rate decision & statement, Trade Balance
  • US: Unemployment rate and related employment data
  • UK: Bank of England cash rate decision, Bank of England Inflation Report
  • China: Manufacturing and non-manufacturing PMI figures

Company News

  • Macquarie Group announced they expect to make another annual profit of approximately $2.2 billion despite the impact of the federal government’s new bank levy. The banking giant attributed the maintenance of their FY17 profit to improved trading conditions in its commodities and global market operations, along with continued growth in the group’s banking and financial services division.
  • Shares in Coca Cola Amatil  took another hit with Woolworths announcing that they will only stock two varieties of Mount Franklin Water, being their six and 20 packs, in addition to retaining single bottles at the front of their stores. This followed Woolworths revealing a few weeks ago that they would not stock the company’s new ‘No Sugar’ variety, and pizza chain Domino’s moving to Pepsi. Since the beginning of the 2017 calendar year, Coca Cola Amatil has seen its share price decline over 17%.
  • Fortescue Metals Group Chief Executive Officer Nev Power conceded that it will be a challenging to further reduce the group’s costs of iron ore production going forward, in order to continue their track record of beating earnings expectations. Currently costs are circa $US12.82 with the target being to reduce this to between $US11 and $US12 a tonne through productivity and efficiency improvements. The average price it is selling iron ore is $US53.27 a tonne. They have also met their FY17 trade guidance exporting 170 million tonnes.

Markets in Review

 

Capital Return

   
 

Weekly

CYTD

FYTD

S&P ASX 200

-0.3%

0.7%

-0.3%

DOW JONES

1.2%

10.5%

2.3%

S&P 500

0.0%

10.4%

2.0%

UK FTSE100

-1.1%

3.2%

0.8%

FRENCH CAC40

0.3%

5.5%

0.2%

GERMAN DAX

-0.6%

5.9%

-1.3%

JAPANESE NIKKEI

-0.7%

4.4%

-0.4%

SHANGHAI COMPOSITE INDEX

0.5%

4.8%

1.9%

ASX200 Biggest Movers for the Week

$1 Australian buys you:

Security

LastPrice

AUDUSD

0.7980

AUDGBP

0.6100

AUDCNY

5.3849

AUDJPY

88.5725

AUDEUR

0.6823

AUDNZD

1.0664

ASX200 Sector Performance for the Week


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