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Monday, 16 April 2018
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No Market Cancer

There are three main market issues bubbling along this morning:

  • Syria.
  • US Results season.
  • Trade wars.

We seem to have forgotten about technology sector regulation and Trump’s adultery accusations.


The main focus on the domestic data front this week will be the Australian jobs numbers on Thursday. The market is looking for 30,000 jobs and an unemployment rate of 5.5%.

We are also going to be hanging on the Chinese GDP number out tomorrow. The expectation is for a number of +6.7% in the first quarter. The GDP number in both January and February be market expectation. They had export and import numbers on Friday. They also have industrial production, fixed asset investment and retail sales numbers tomorrow. There are US retail sales numbers tonight.


Thomson Reuters engage Fathom consulting to do some economic forecasting for them. They have a gauge of Chinese GDP growth called the Fathom China Momentum Indicator (CMI) - they explain it like this and it is shown below: 

"Having long been sceptical of official Chinese GDP statistics, we have developed our own indicator to gain a better insight into its economic activity. The China Momentum Indicator (CMI 1.0) was based on the three alternative indicators for economic activity suggested in private by Li Keqiang, the now Chinese Premier: railway freight; electricity consumption; and the issuance of bank loans. The three original indicators, used to develop our initial CMI 1.0, whilst clear and unbiased, were not seen by us to be broad enough to fully capture economic activity in China. Our now updated CMI 2.0 is created using ten indicators, and tracks a broader range of credit instruments. In our choice of indicators we have, wherever possible, avoided measures used in the construction of the usual expenditure components of GDP, focusing instead on shadow measures of economic activity. We believe these to be less prone to manipulation than the headline GDP figures. CMI 2.0 has implied growth has recovered far more rapidly than CMI 1.0, from the trough in October 2015, as Chinese authorities decided to ‘double-down’ on investment- and export-led growth."


Our futures down 6 this morning but they haven’t traded since the coordinated US and UK and France backed missile strikes on Syria, 105 missiles. The US and UK have been very careful in describing these attacks as an attack on chemical weapons facilities and stockpiles making it very clear they are not conducting a Desert Storm style attempt at regime change. The main market risk here is not Syria but Russia. JP Morgan says the oil price could go to $80 a barrel on the back of Syria and Middle East conflict as well as the prospect of the US imposing new sanctions on Iran after Saudi Arabia intercepted three missiles over Riyadh, thought to be fired by Iran targeting the Saudi Aramco oil company assets which the Saudi government are in the process of selling. There are suggestions that following that attack Trump will not re-certify the waiver of US sanctions against Iran on May 12. 

The more significant Syrian issue is the US relationship with Russia with Vladimir Putin on Sunday saying that future Western attacks on Syria would bring chaos to world affairs. A statement from the Kremlin reports a telephone conversation between Putin and Hassan Rouhani of Iran (Iran and Russia are being seen as supporting the Syrian President Bashar al-Assad) with the two agreeing that the US strikes have damaged the chances of achieving a political resolution in the seven year Syrian conflict. Hard to disagree with that conclusion. Putin has said that if such actions, committed in violation of the UN Charter, continue, then it will inevitably lead to chaos in international relations”.


The US results season started on Friday rather inauspiciously with fairly significant falls in some of the big financials aftrer results. JPMorgan Chase (-2.7%), Wells Fargo (-3.4%), and Citigroup (-1.6%). The financial sector was the worst performing sector on Friday night down 1.22%. The bank sector lost 2.6%. This is expected to be a very solid results season with earnings up 18.6% in the first quarter compared to a year ago thanks in part to Trump’s December tax package as well as a lower US dollar and the backdrop of solid enough economic improvement. It would be the biggest earnings rise in seven years.

Having said that of course if companies do what is expected their share prices don’t move and with this sort of expectation the odds are on companies under hitting rather than beating already very high earnings growth expectations. As we have seen on Friday, the risks are on the downside if the market is already expecting something really quite dazzling.

Morgan Stanley, Goldman Sachs and Bank of America all report this week along with Netflix, GE, Johnson & Johnson, Proctor&Gamble. This is the results calendar for this week:

You can see the whole US results calendar on THIS PAGE


It’s all gone quiet on the Trump Trade Tweet front. This is being seen as a pre-cursor to a trade deal with China who last week appeared to declare themselves open to a more accommodating trade arrangement. Notably the US Treasury Department’s foreign exchange policy review on Friday refrained from calling China a currency manipulator - seen as a sign that trade relations are cooling.

Chinese export and import numbers on Friday saw their surplus with the US up 19.4% from a year earlier. Exports to the US were up 14.8% year-on-year after a 5.6% drop in March. Imports were up 8.9% up from 3.2% in March.


After Bush’s Iraq 1 War and Bush Junior’s Iraq 2 War the accepted stock market response to War is to sell rather than buy and wait to exploit any opportunities to buy at lower prices. Bottom line - "War"causes buying opportunities and even with significant conflicts like the Iraq Wars, the stock market impact is temporary and will be reversed in time. In other words they create buying opportunities. Initially the uncertainty causes selling so this is probably not the moment to buy. This is a chart of the S&P 500. Trendlines are always a bit arbitrary but we are clearly testing the uptrend without doing so decisively just yet. With this new global confusion we should wait for the trend to crack or resume rather than assume it will resume. Happy to be holding a decent level of cash at the moment. We have 18% in the SMA at the moment and 45% in the Income SMA.

The Syrian issue has seen the oil price up 8.6% last week. We are playing this through WPL - the Syrian issue has very conveniently blown up after a significant share price fall in WPL caused by their recent capital raising and acquisition. That in itself was enough of a reason for us to buy it, the oil price rise is icing on the cake. We’ll stick with WPL for now while cognisant of the fact that the Syrian based oil price rally is short-term. The stock is on a 5.6% yield and a 21x PE. It is not the most volatile stock but is still 12% off its year high, 5% below the average broker target price, and 24% below intrinsic value. At 3048c some broker target prices go as high as $40. Not expensive in other words. Happy to hold. 

The aluminium price has spiked after the US imposed sanctions on RIO’s Russian partner Rusal leaving RIO having to call force majeure on customer contracts (force majeure is a legal term meaning that a contract has failed for unforeseeable reasons). Almost all Rio’s aluminium output comes from their Rusal joint venture. The aluminium price has hit a six-year high and has had its biggest gain in a week since 1987. AWC is seen as a proxy for global economic growth because it represents aluminium demand. You can see below a solid uptrend in AWC since 2016 with the aluminium price in red. This is not the time to be buying the stock, after a spike for temporary reasons. The stock is on an 8.5% yield on a PE of 16.3x. It is not expensive. It is trading 4% below the average broker target price, most brokers are buyers, and it is trading 14% below intrinsic value. It is 51% up from the year low and 5% from its year high. Good stock at the right time, cyclical, a big trading stock.

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