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Market Wrap 11/08/2019

By: Adon Ewing


Equities

There was turmoil in the markets this week, primarily due to the escalating US-China trade war. As China hit back at US tariffs by devaluing the yuan and banning US agricultural imports, the S&P500 dropped almost 3% and $AUD48 billion was wiped off the Australian sharemarket during Tuesday’s trading session. Gold miners, however, have surged as investors flock towards the safe haven asset. The S&P ASX200 closed at 6,584.40 on Friday afternoon, down 2.7% for the week.

AMP

AMP completed a $650 million share issue on Friday and the stock price rose almost 12 per cent. Earlier in the week, AMP’s new chief executive Francesco de Ferrari outlined an ambitious strategic overhaul, aiming to grow AMP Bank and AMP Capital, while shrinking the wealth business and resurrecting its stalled deal with Resolution Life. Although a number of institutional investors are optimistic about the restructure, some analysts remain sceptical, concerned about the lack of detail and questioning the reliability of AMP’s forecasts. A survey conducted by Bloomberg reveals that the consensus stock price among analysts is $1.70 per share, 23c lower than the closing price on Friday.

Commonwealth Bank (CBA)

On Wednesday, Commonwealth Bank disappointed the market, reporting an $8.49 billion cash profit for the year, down 4.7%. The full year dividend remained unchanged from last year at $4.31. Key headwinds faced by CBA included lower official interest rates, customer compensation costs, reduced fee income and higher operating expenses. Revenue slipped 2% over the year and operating expenses grew 2.5%, mostly due to additional staff hired in risk and compliance to assuage the concerns of regulators. Although CBA stated that it has “more to do on costs”, analysts say that the absence of a clear plan for cost reductions was part of the reason why the stock price dropped 2.5% after the open. However, taking a long term view, over the past decade, CBA has increased its market share in products such as credit cards, home loans, household deposits and business lending. Even after this week’s drop, the bank is still worth $8 billion more than it was in February, when the final report from the banking Royal Commission was published. Commonwealth Bank also revealed a $US100 million investment into the Snoop Dogg-backed Klarna, a buy-now-pay-later company based in Sweden.

Uber (NYSE: UBER)

Yesterday, Uber Technologies reported a record $US5.2 billion ($AUD 7.7 billion) quarterly loss as shares dropped 6%. A huge increase in research and development spending propelled a 147% increase in Uber’s costs to $US8.65 billion in the quarter, even as Uber announced a hiring freeze for software engineers and product managers. Haris Anwar, an Investing.com analyst, attributes the drop in Uber’s stock to the “absence of a clear path to grow revenue and cut costs”. Uber’s core ride-hailing business recorded only 2% revenue growth, while food delivery business Uber Eats increased revenue by 72%. Both Uber CEO Dara Khosrowshahi and Lyft have described the ride-hailing market as “more rational” and “progressively improving”, as price wars abate. The stock currently trades 11% below its May IPO price.

Commodities

On Tuesday, the benchmark spot price for 62 per cent iron ore fines slumped below the $US100 a tonne level, the first time since June 6. The spot price has crashed 22.4% since its five year high of $US125.77 a tonne recorded on July 7, and is now in a technical bear market. Blame for this drop has been attributed to the deepening US-China trade war and lower steel prices. It also appears that Brazilian iron ore production is recovering from complications following Brazilian miner Vale’s Brumadinho dam disaster in January. Commonwealth Bank mining and energy analyst Vivek Dhar predicts iron ore prices averaging $US110 a tonne in the September quarter before dropping to $US100 a tonne in the December quarter.

On Wednesday, spot gold prices breached the $US1500 per ounce ceiling for the first time since April 2013. A slowing global economy and an escalation of the US-China trade war has turbocharged the growth of safe-haven assets. Analysts at Societe Generale mentioned “the current stage of the economic cycle, the scarcity of safe-haven assets and central bank purchases” as factors which may prolong this rally in gold.

Foreign Currency

In a dramatic escalation of US-China trade tensions, market watchers expect a full-blown currency war to erupt, as China has allowed its currency to fall below the symbolic 7 yuan per 1 US dollar mark, its lowest point since the global financial crisis. President Trump declared China a currency manipulator, the first time the US has done so since 1994. China’s Commerce Ministry said that Chinese companies have also stopped buying US agricultural products.

On Wednesday, a surprise 50 basis point cut of the official cash rate by the Reserve Bank of New Zealand pushed the New Zealand dollar down 2.1% to US64.08c, its lowest level since January 2015. Governor Adrian Orr vowed to do “whatever it takes” for the bank to achieve its targets. This unexpected move also caused the Australian dollar to sink to a 10-year low of US66.77c to one AUD.

Bonds

The intensifying US-China trade war has left its mark on US Treasuries yields. The so-called yield curve inversion describes a situation where long term government bonds (typically US 10-year Treasuries) fetch lower yields compared to shorter term bonds (typically US 3-month notes). On Tuesday, the most extreme yield-curve inversion since just before the global financial crisis occurred, as 3-month Treasury notes delivered a 32 basis point premium over 10-year notes. This yield curve inversion is regarded as a key recession indicator, as it has preceded every US recession in the past 50 years. Investors have fully priced in a rate cut from the Federal Reserve in September, and traders are betting on a further two cuts prior to the end of the year. Central banks in New Zealand, India and Thailand also undertook monetary easing on Wednesday in an attempt to protect their economies from shaky global macroeconomic conditions.

Australian Property

The NAB Commercial Property Index rose nine points to +7 in the second quarter of 2019, revealing a growing confidence in the commercial property market. Underpinned by low office vacancy rates, market sentiment was highest in the office and industrial sectors. Sentiment also increased in the retail property sector but it remains in negative territory. The only sector to record a decrease in sentiment was CBD Hotels, now at its lowest point in a decade.

Rural Funds Group (RFF)

Rural Funds Group is an ASX-listed REIT, or real estate investment trust, specialising in the ownership and lease of poultry farms, cattle stations, almond and macadamia orchards, vineyards and cotton farms. On Tuesday morning, Bonitas Research, an offshoot of infamous short-selling firm Glaucus Research, released a report describing RFF’s equity as “ultimately worthless”. They alleged that management “fabricated” financial statements by “artificially inflating rental income” and described transactions made by the company as “fraud”. Shares dropped 42% on Tuesday prior to a trading halt, but partially recovered when trading resumed on Thursday, as Rural Funds held an investor webinar and released a report rebutting Bonitas’ claims. On Twitter, Bronte Capital’s John Hempton, a well-known short seller, described the Bonitas report as “highly questionable”. EY has been appointed by Rural Funds to independently investigate Bonitas’ claims.


Sources: Australian Financial Review, Sydney Morning Herald, Investopedia, Bloomberg, Bonitas Research, MarketWatch, ABC News

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