Week In Review - 4 April 2016

By Marcus Damen - April 4, 2016

There are some emerging challenges in the US economy itself. In particular, the decline in corporate profits.

News in Review

  • US non-farm payrolls increased by 215,000 in March, providing a positive sign for the world’s largest economy amid fears of a global economic downturn. The unemployment rate edged up to 5% in March, but that was largely due to more people joining the workforce. The closely watched wages portion of the report showed strength, with average hourly earnings rising 2.3% year on year.  Another important metric, the labor force participation rate, increased as well, hitting 63% and marking the highest level since March 2014.

  • A dominant driver of markets over the past week was the Fed Chair Janet Yellen’s speech to the Economic Club of New York. Equity markets had been flat to slightly negative ahead of the speech but rallied following Yellen’s remark that “I consider it appropriate for the committee to proceed cautiously in adjusting policy”.

  • The European Commission’s economic sentiment index fell 0.9pts to 103.0 in March, the weakest reading in over a year but remains relatively robust by historical standards.  Confidence ebbed a little amongst consumers and in the service sector, but was little changed in the industrial sector.

  • The first estimate of US corporate profits revealed an 11.5% drop year on year to 31 December 2015, the largest fall since the 31% collapse at the end of 2008 during the height of the GFC. The decline was led by the energy sector and exacerbated by wage growth.

  • While retaining its AA- credit rating for China, Standard and Poors revised its economic outlook the world’s second largest economy from stable to negative. 

  • The Westpac MNI China Consumer Sentiment Indicator rose 6.1% to 118.1 in March from 111.3 in February, its highest level since September 2015. Confidence has waned in recent months following financial market volatility and concerns over China’s slowing economy. The rise in sentiment is attributable to increasing confidence that Chinese authorities have plenty of fire power left to stimulate their economy.

  • The Nikkei lead losses across Asian stock markets on Friday, tumbling more than 3% as a key Bank of Japan (BoJ) survey revealed confidence among major manufacturers fell to a three year low. The survey marks the difference between the percentage of firms that are upbeat and those that see conditions as unfavourable. 

Comment

While Janet Yellen and the US Federal Reserve have been pointing to potential weakness from offshore (particularly Europe and China) as reasons to maintain a very cautious approach to interest rate rises, there are also some emerging challenges in the US economy itself. In particular, the decline in corporate profits referred to above is something to watch carefully. Declining profits often result in a slowdown in employment activity which in turn can lead to recession.  

This current case of declining profits will be particularly interesting to watch as at this stage it appears mostly due to weakness in the energy sector. While it is understandable that falling energy prices would result in falling profits in that sector, theoretically there should be many more businesses that benefit from this, given that energy is a significant input cost, and therefore overall profits should remain steady or rise. Given that employers do not appear to have slowed down on the hiring front yet suggests that they are currently viewing this issue as a temporary one and that the benefits should flow through before too long.  

The Week Ahead

  • US:  FOMC Minutes , Markit Services PMI (Mar)
  • Australia: RBA Interest Rate Decision, RBA Rate Statement 
  • Europe: Unemployment Rate (Feb), ECB President Draghi's Speech 
  • China: FDI - Foreign Direct Investment (YTD) (YoY) (Mar), Caixin China Services PMI (Mar)
  • Japan:  Eco Watchers Survey: Outlook (Mar), Leading Economic Index (Feb)

Company News:

  • Energy utility owner Duet Group expects to take full control of the main Western Australian gas transmission line in April after it raised $200 million in a placement offer.    Duet shares will resume trading on Friday and the company will issue 90.9 million new stapled securities at $2.20 each, which represents a 3.5 per cent discount on the price at Wednesday's close.

  • Origin Energy has signed a 15-year contract with the new Moree Solar Farm in northern NSW, which will generate enough energy to supply 24,000 households. Origin, which in October said was the world's first energy company to sign up to all seven climate change initiatives under the global Carbon Disclosure Project, on Thursday said the recently commissioned plant is expected to produce 145 GWh of energy annually.

  • Primary Health Care announced that it has entered into a binding agreement to sell 100% of its Medical Director business to funds advised by Affinity Equity Partners (“Affinity”) for $155 million.

  • Tesla unveiled a new, cheaper model of its electric car aimed at the mass market on Thursday, taking orders for more than 115,000 in the past 24 hours. The new Model 3 will have a base price of $35,000, half that of the two models it now sells -- the Model S and the Model X, which start at $70,000.

Markets in review

 

Capital Return

   
 

Weekly

CYTD

FYTD

S&P ASX 200

-1.7%

-5.6%

-8.4%

DOW JONES

1.6%

2.1%

1.0%

S&P 500

1.8%

1.4%

0.5%

UK FTSE100

0.6%

-1.5%

-5.7%

FRENCH CAC40

-0.2%

-6.8%

-9.8%

GERMAN DAX

-0.6%

-8.8%

-10.5%

JAPANESE NIKKEI

-4.9%

-15.1%

-20.1%

SHANGHAI COMPOSITE INDEX

1.0%

-15.0%

-29.6%

$1 Australian buys you:

   $0.7667
£0.5343
¥4.9536
¥86.0545
€0.6736
$1.1111

Biggest winners and losers last week - by sector

sector performance chart

 

Biggest winners and losers last week - by company

Disclaimer

 
This material is intended for the use of the clients of Pitcher Partners Investment Services only.  It is current at the date of preparation, but may be subject to change.  This document does not constitute financial product advice.  It is of a general nature and has been prepared without taking into account any person’s objectives, financial situation or needs.  Before acting on the information you should consider the appropriateness of it having regard to your objectives, financial situation or needs and seek independent advice.  You should obtain and consider a Product Disclosure Statement in relation to any financial product before making any decision about acquiring the product.  To the maximum extent permitted by law, Pitcher Partners Investment Services Pty Ltd and its representatives will not be liable for any loss or damage incurred by any person directly or indirectly for any use or reliance on this document.

 


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