Protrader – July 2019 Market Wrap

//Protrader – July 2019 Market Wrap
July Stock Market Wrap 2019

XJO Up 165
All-time high achieved

 

With little negative news on the domestic front, Australia’s market initially consolidated, upon the stellar 6 months, that has seen the market gain 21% since Dec 24th, and then as July went on, creeped up to reach new all time highs, beating the previous high set Nov 1st 2007.

The two underlying issues of interest, are that even though Australian equities are conceptually expensive with an avg P/E of 16.3, this level is actually justified, with $12.5 trillion dollars invested in bonds with negative yields on the global market, institutions really have no where else to go.

This combined with the recent RBA decision, has ushered in an investment paradigm shift, culminating in “safe” high yield stocks being pursued both by retails investors, and Australian funds.

Seriously, why would you have your money in cash ?

As the month drew to a close, creating consecutive all time highs, and holding it’s collective breath, whilst peering into the looking glass of earnings season, it had the air taken out by a few Trump tweets, bursting any imminent US/China trade agreement, that only 30 days before following the G20 seemed assured, and setting the market into a state of uncertainty.

 

KEY ECONOMIC DATA

  • Iron Ore Hit 5yr high.
  • RBA lowered cash rate by 25 basis points to unprecedented 1%.
  • Coalitions $158 B tax cuts came into effect.
  • China posts its lowest qtr growth rates in 27 yrs (since1992)
  • Japanese Exports dropped more than expected
  • Singapore trade data came in lower than expected.

DOW JONES IND AVG 26,805 – 26,864: UP 59
Trump tweets back

 

 

DJI 12 MONTH CHART

The positive sentiment from the G20 summit particularly related with US /China relations, combined with the expectation of not only another US interest rate cut, but a changing of the FOMC ( Federal Open Market Committee) position and stance towards future interest rate cuts, helped propel the market another 700 points, on top of the June 1770 points gain, till the 15th of July, when the market hit a high of 27,389 (having only broken the 27,000 for the first time in history on July 11th).

During this period both the DOW and the NASDAQ closed at several consecutive record highs, with the S&P 500 hitting, and then closing above 3000 for the first time ever, with the S&P 500 up over 20% for the calendar year, and the NASDAQ up over 25% for 2019.

Corporate Earnings

What is important to understand about the market during July, is that this isn’t all froth and bubble, with some very real tangible fundamental data coming out, and providing further support for the market.

At the time of writing, around 77% of the S&P 500 companies had beaten market earnings expectations. What is of particular significance is that this is the third consecutive earnings qtr where the company earnings have come in higher than the market expectation. Furthermore, what has also caught the market completely by surprise was that for many companies they raised their earnings outlook, and profit guidance/forecast for the remainder of the year.

 

Some of the companies that beat earnings forecasts:

  • General Electric
  • Apple
  • Facebook
  • Google
  • McDonald’s
  •  Microsoft
  • Starbucks
  • Twitter
  • Citigroup
  • Johnson & Johnson

It was this strong earnings results coupled with continued robust economic data that then enabled the DOW from the 15th of July to the 30th to consolidate, and hold on to those gains, that emanated from a rally that began on June 3rd.

Trumps Tweets

Although it is possibly unfair to lay all the blame on Trump, as there was already a degree of concern after the FOMC had failed to commit to further cycle of interest rate cuts at the July 30th meeting, which disappointed the market.

There is no doubt that Trumps tweet outlining a new unexpected narrative surrounding the US /China trade negotiations on the 30th, directly caused the 333 point on the final day of the month, with at one point intra day having wiped out the entire months gains, before regaining some ground and closing at 26,864.

Key Economic Events and Indicators

  • US Employment data blew away market expectations. Beating it by 40%.
  • US Unemployment rate, inched up @ 3.7%
  • US Budget Deficit widened by 23% to $747 b
  • US Retail Sales again better than expected
  • US GDP remained above 2%, coming in at 2.1%
  • US Jobless claims fell to a 3 month low.
  • US Interest Rates cut by a further .25%

US / China Trade War : Changing Narrative

The US China trade negotiations took a dramatic twist late in the month, when what appeared to be out of nowhere, Trump rattled off a series of tweets, effectively outlining a new narrative that any trade deal wouldn’t be possible until after the 2020 US elections, as China were hoping to negotiate with a weaker US president.

Furthermore he effectively accused the Chinese of being duplicitous and not negotiating in good faith. To top it off, he then announced new sanctions to be imposed on a further $300 b of Chinese goods, from Sept 1st.

Although this may appear irrational and unstable, however the worsening Chinese economic picture, suggests Trump understands exactly the position of negotiations and the importance of communicating to the Chinese, that he is happy to wait as long as necessary.

The below 3 charts, help outline the increasingly precarious position the Chinese economy  finds itself.

 

 

As the charts above outline, China’s growth in-conjunction with US exports has dropped dramatically, yet disconcertingly China’s debt is increasing.

When one combines the worsening economic situation with social elements such as graduation season, where another 10 million Chinese University graduates have now hit the employment market, Trump knows that the gains for both himself politically and the US economically will only increase going into 2020.

Thus, expect more twitter turbulence.

 

OIL PRICE UPDATES: Geopolitical Issues come to the fore

 

 

WTI Crude – Dropped .58c: $59.18 – $58.60

The Oil price was greatly impacted upon by geopolitical issues throughout the month of July, particularly heightened tension in the Middle East.

However macro economic anxiety surrounding world growth and the ongoing concerns related to the US /China trade negotiations dampened the rally.

The month started out with a drop down to the $56 mark, however on the 4th, UK marines seized an Iranian tanker which was allegedly violating EU sanctions.

What followed was a general deterioration, with tit for tat retaliatory actions with drones being shot down, UK Oil flagged ships being hijacked by Iran, which all culminated in the oil price being pushed above the $60 mark.

In the back ground of all this, was IMF data predicting a slowing in world growth, and thus lower demand for oil which, sent the oil price from above $60 to below $55 in 4 trading days, before continued larger than expected US stockpile draw down helped the price to steady and climb as the month came to a close, finally closing at $58.60.

Key Oil Price Influences

  • OPEC & Russia agreed to maintain existing output level.
  • Iranian tanker seized by UK authorities.
  • Iran announced complete break from 2015 Nuclear deal, and promptly enriched Uranium.
  • China/ US trade talks deteriorate again.
  • Iran hijacked a UK flagged Oil tanker.
  • US- Iranian sanctions starting to bite, with Iranian oil exports at 3 decade low.
  • US Crude stockpiles dropped more than expected ( 10.8 mb), culminating with the last 6 weeks US inventory levels plunging by 40 mb.

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