Sector rotation the main game in town
A less eventful session today with the Banks opening strongly but suffering some selling after early strength, while the resources were a mixed bag. The interesting aspect is more around sector rotation – not a lot of obvious new buying coming off the sidelines, just redirection of existing money. When the banks were strong yesterday, the resources copped some selling and the same was true today on some of the other sectors.
It seems to us that fund managers are sitting on the fence in aggregate terms, but just flicking between what’s hot and what’s not. You can see why this would be the case with overseas money, and the reluctance to bring new money into a market post a BIG rally in the currency, however the domestic fundies are a different story – it speaks more to the lack of any real conviction in views at the moment.
To recap our views, we think the mkt trades higher into month end however we’ll then be more aggressively increasing cash for a more mundane Aug / Sep. To date, the banks are up around +3.5% for the month with the average gain (post GFC) in the month of July of around +4.49% - some more upside however the last 2 days buying has been fairly decent.
On the broader market today, we had an overall range of +/- 27 points, a high of 5770, a low of 5743 and a close of 5761, up +29pts or +0.51%.
ASX 200 Intra-Day Chart
ASX 200 Daily Chart
Alumina – Alcoa was out overnight with results and they delivered a miss in terms of earnings ( ~1.8%) but inline revenue. Importantly, the Alumina unit (of which AWC has a 40% interest) delivered US$227m worth of earnings which was a slight miss and that’s why we saw some selling in AWC stock today – shares finishing down by -2.79% to $1.915. We think AWC will probably tread water for a while now (given the miss) and recent strength in the share price.
Alumina (AWC) Daily Chart
Santos – out with production numbers this morning and the stock was strong on the back of it – largely because we saw a better result in terms of debt and costs, which are grinding down, as per the companies key focus for the next year or two. Free cash flow breakeven is now $US33 down from around US$36.50 in 2016 – which is a good result. The mkt hates Santos, has been burnt too many times so any less bad news attracts buying. If they can de-lever the balance sheet, gets costs down, they might actually do OK. The stock up by +8.28% to close at $3.27
Santos (STO) Daily Chart
Macquarie (MQG) – this has been under pressure lately and it seems to have a ‘smell’ about it – on up days it’s failed to participate – and on down days it’s underperformed. 63% of MQG’s earnings are offshore and the average AUDUSD rate was around 75 last year, if the currency stays around 80c, this could impact their earnings negatively by around 4%. Interestingly, the US banks have seen weakness in fixed income divisions mainly however that’s not a big parts of the MQG book. If the currency spikes through 80c and MQG gets hit, buying weakness looks a good play here. They have their AGM next Thursday (27th July).
Macquarie (MQG) Daily Chart
Have a great night
The Market Matters Team
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