Australian Market Weekly ThinkTank

Equities markets were broadly lower this week as fears that a second wave of Coronavirus cases in the US could scuttle hopes of a v-shaped economic recovery. US daily confirmed cases topped 40,000 per day - a record since the start of the pandemic.

The governor of Texas temporarily halted the state's reopening on Thursday as the state set record hospitalisations for the 13th day in a row. Also reporting record rises in cases were a number of southern and western states, including economic powerhouse California. Apple Inc (AAPL) continued to close stores, another 14 in Florida, and shares of Walt Disney Co (DIS) fell on news that it would further delay the reopening of its California theme parks. On the brighter side, the number of people hospitalised people in New York fell below 1000 per day for the first time since the peak of the crisis in March.

Meanwhile, the head of the World Health Organisation said that it would likely be at least a year before an effective Coronavirus vaccine would be invented.

As a result, the S&P500 benchmark of US shares fell 2.9% after a volatile week. In Europe, the FTSE100 in the UK and the DAX in Germany were each down around 2%. Crude oil futures tumbled nearly 4%, and natural gas over 7% on fears that the reimplementation of shutdowns would put another major dent in the demand for these commodities.

On the local market, the gold sector was the clear outperformer, rising 5.2% compared to the ASX200's 0.65% fall. The gold price continued to firm, up 1.6% as it looks set to break free of its recent trading range below $1750. Materials stocks were another rare improver, on the back of continued strength in base metals prices. Strong gains in LME aluminium (+1.8%) and copper (+2.2%) assisted mining heavyweights BHP (+3.0%) and RIO (+2.8%), and iron ore prices held firm helping FMG (+2.8%).

JHX (-1.2%) slipped despite reporting expectations of improved earnings on the back of a resilient US housing market, as did QAN (-12%) after it announced it would cut as much as 20% of its workforce in a cost cutting drive that with expected fuel savings could cut $15billion in expenses. QAN also completed a $1.3billion capital raising at a 13% discount to the price before the announcement.

SHL (+4.8%) was the best performing Top 50 stock, as it provided the markets with an earnings update that foreshadowed flat earnings. Most analysts considered this a commendable achievement given the recent impact of Coronavirus on the Australian economy. Broker Citigroup increased their price target on SHL from $32.50 to $34 and retained a buy rating.

France, Germany, and European purchasing managers index data showed the services and manufacturing sectors within Europe's major economies snapped back sharply in May. The readings were better than expected with France manufacturing activity even registered an expansion.

In the US, new homes sales showed that the US housing market has lost very little net momentum as a result of the pandemic, as 623,000 new home were sold during the month of May. This was up 4,000 dwellings from April and well ahead consensus estimates for a 492,000 increase.

This backs up a very strong print on the Housing Market Index last week, and also indicates the American consumer remains confident in their future despite the chaos of the last few months.

Durable Goods Orders in the United States increased by 15.8% on a monthly basis to $194.4 billion in May following April's decline of 17.7%. The result was significantly better than market expectations for a 10.6% increase.

Durable goods are an important economic indicator because they represent large, and generally expensive items such as industrial and farming machinery, and for retail consumers, household whitegoods. In this way, Durables goods data spans both business and the consumer. It provides an insight into their collective confidence into the future - as one would not likely make an investment in a durable good without sufficient confidence.

Personal incomes fell by 4.2% as the impact of reduced working hours resulting from shutdowns took their toll, and after one-time government crisis payments popped incomes a record 10.8% in April. The fall was better than expected however.

Personal spending increased by 8.2%, up from April's 12.6% drop. May's result is the highest rate of increase on record. Note though that much of the spending came from states like California, Texas, and Florida that have been hardest hit by the possible second wave of infections.

Inflation remained weak as the Fed's preferred measure of inflation, the personal consumption expenditures (PCE) price index excluding the volatile food and energy components, edged up 0.1% in May.

Copper stocks in Shanghai Futures Exchange warehouses dropped 14.2% in the week ended June 19. This was the lowest level since January 2019. Copper inventories are down 71% from this year's peak set in the week of March 13. Chinese imports of unwrought copper are up 12.4% to the end of May compared to the same period last year. Imports of copper ores and concentrates are also 2.2% higher.

Data Tuesday showed Australian business activity returned to a modest rate of growth in June. The CBA Flash PMI, a survey of around 85% of manufacturing and services businesses, printed 52.6 in June, up from May's dismal reading of 28.1.

A figure greater than 50 indicates growth. This was the first indication of growth in the index since the start of coronavirus shutdowns.

James Hardie Industries (JHX) on Monday raised its first-quarter operating profit-margin forecast for its North American business. The company reported improved activity in the US housing market over the past seven weeks despite the coronavirus pandemic. JHX lifted cash guidance to $640 million from $600 million.

A cost-cutting drive also helped to improve EBIT margins to 27-29% compared to earlier estimates of 22% to 27%. "The better than expected underlying housing market during our Q1 FY21 ... resulted in volume growth in the second half of the first quarter," Chief Executive Jack Truong said in a statement.

Check the Broker Moves section for how the major research houses viewed the James Hardie news.

On Thursday Qantas (QAN) said it would reduce its workforce by 20% as part of a broader cost savings plan that along with expected fuel cost savings, would reduce the airlines expenses by A$15billion. To shore up the balance sheet, QAN also undertook a A$1.9 billion equity placement at a 13% discount to Wednesday's closing price.

"We have to position ourselves for several years when revenue will be much lower," Qantas Chief Executive Alan Joyce said of the three-year plan. "And this means becoming a much smaller airline in the short term." The 6,000 job cuts will come from across the airline's 29,000-strong workforce. Hardest hit would be non-operational and ground operations staff, with the remainder a mix of cabin crew, engineers and pilots.

Joyce said he wasn't expecting international operations to properly recommence until July 2021. On the domestic front, it has begun increasing flights based upon state border re-openings, and would likely attain 40% of usual capacity by July. This would improve to around 70% next financial year, before returning to full capacity by FY22.

Check the Broker Moves section for how the major research houses viewed the Qantas news.

The Australian stock market's 1 year forward PE Ratio is 19.3 versus 19.4 for the Developed Markets Index. This implies that the Australian stock market offers comparable value to other developed markets. The 1 year forward PE Ratio for all markets has been increasing over the last 3 months as prices recover from the impact of the Coronavirus pandemic. The increase in PE Ratios however, signals that price increases have not been accompanied by commensurate earnings increases, meaning that overall stocks have seen a reduction in their value.

Looking at where the values lies in the local market only, the 1 year forward PE Ratios (PER) for the key ASX sectors paint a picture of haves and have nots. Clearly, sectors such as IT, Healthcare and Utilities have seen strong increases in prices since the market lows, but this has generally not been accompanied by a commensurate increase in earnings in those sectors. As a result, the IT sector for example, has seen its PER blown out to an eye-watering 47 times earnings.
 

Looking at the other end of the spectrum, sectors such as Property (PER 16.2), Financials (PER 15.2), and Materials (PER 14.8) appear to be offering better value.

Market breadth for the ASX 300 has deteriorated over the past week, with roughly 30% fewer companies trading above their 1-2 week moving averages. This is down significantly from over 90% a month ago.

To compare, note that at the top of the market before Coronavirus hit in February, this statistic was approximately 60%, and at the March lows, approximately 7%. Encouragingly, the percentage of companies trading above their longer term moving averages appears to be less impacted by last week's downturn.


New Highs-New Lows

1 month high			3 month high			3 month low	1 year high		1 year  low	All time high	All time low
ABP	GSBM22	RUL	ABP	MDI	VUL	AVHDA	AUC	TPW	VG8	BC8	VG8
ANZPH	HM1	SPL	ANZPH	MGV	WRM	NUF	BC8	VUL		MGV	ZEL
AUC	KAI	ST1	AUC	MMM	YOJ	VG8	DEG			MMM	CPH
BC8	M7T	STN	BC8	MTH		ZEL	FRN			RAC	VG1
CML	MCT	SUNPG	CML	OPH			KAI			RMD
CST	MDI	TPW	CZR	OZL			M7T			STN
CURE	MGV	VUL	DEG	RAC			MCT			TPW
CZR	MMM	WRM	ELX	RGL			MDI			VUL
DEG	MTH	YOJ	FCL	RMD			MGV			CURE
ELX	OPH		FRN	RTR			MMM
FCL	OZL		FZO	RUL			MTH
FPH	RAC		HM1	ST1			RAC
FRN	RGL		KAI	STN			RMD
FZO	RMD		M7T	SUNPG			RTR
GBND	RTR		MCT	TPW			STN

Those using a Turtle break out system may wish to note the 1 month, 3 month, and 1 year break outs/break downs in the table above.


Volume Actives
 

Activity spike within last 5 trading days
5GN	CIP	IMC	OBL	SUL
9SP	CQR	JBH	PAR	SWF
AEF	CSR	KGN	PBH	TNT
AFG	DEG	KMD	PPH	TRS
ALK	EHE	KZR	PPT	URW
AMC	EOS	M7T	PRU	UWL
ANN	ERX	MCT	RBL	VUL
AQR	ETHI	MEI	RED	WAF
AVN	FLT	MGV	RGL	WDIV
AX1	FXL	MP1	RMD	WEB
AYS	GGUS	MSB	RMS	WES
BGL	HT1	MYX	RXL
BXB	HUB	NSR	SAR
CCX	IDX	NVX	SKC
CGFPB	IHWL	NXT	SPT

The table above shows stocks that over the last week have experienced a spike in volume that is greater than 2.5 standard deviations from the average volume over the last 18 months. Spikes in volume are often a sign that larger investors are moving into or out of the market for a particular stock, and are usually worth further investigation.


Relative Strength Comparative
 

Top 10 Outperformers      All ASX vs ASX300			Top 10 Outperformers        ASX50 vs ASX300			Top 10 Underperformers    ASX50 - ASX300
1mo	3mo	1yr	1mo	3mo	1yr	1mo	3mo	1yr
MCT	PDI	ZNO	SGP	FMG	FMG	CSL	OSH	OSH
NVX	CHN	DEG	QAN	A2M	A2M	WPL	QBE	TWE
MGV	DEG	CHN	JHX	ASX	CSL	BXB	SCG	SCG
IMC	MMM	PDI	ANZ	NCM	COL	A2M	VCX	VCX
RGL	GTR	SKY	NAB	APA	ASX	ORI	LLC	QAN
IP1	GSM	LEG	WBC	GMG	WES	RHC	QAN	WBC
SPT	MGV	AXE	MQG	AMC	GMG	APA	GPT	NAB
WOA	AXE	CEL	CBA	RIO	APA	NCM	NAB	WPL
OPY	RGL	RAC	FMG	WES	WOW	TLS	WBC	STO
DW8	WOA	BET	ALD	BHP	JHX	ASX	SGP	ANZ

The table above shows stocks that have outperformed and underperformed the broader Australian stock market over the past 1 month, 3 months, and 1 year periods. Outperformance can often indicate accumulation by larger investors, and underperformance can often indicate selling by larger investors.