Australian Investment Blog

The ASX200 is set to open down around 22-points this morning following the 335-point tumble on Wall Street, but with BHP trading down ~60c / 2% that may prove to be a touch optimistic. The local market has been under pressure from the Royal Banking Commission as a constant flow of “ugly” news surfaces, but we still question whether any major surprises will be forthcoming, hence our feeling that we may actually be looking at a reasonable buying opportunity in the Australian “big four” banks, at least on a relative basis – over the last 5-days the ASX200 is -0.6% whereas the banks are down -2.8%.

Remember how disliked the resources sector were only 2-years ago and BHP has subsequently doubled.

MM remains mildly bullish the ASX200 short-term, targeting the 6250 area - BUT we need a close above 6030 to reaffirm this view.

Today’s report is going to touch on 3 parts but with the main focus on the FANG stocks – Facebook, Amazon, Netflix and Google plus APPLE can be thrown in for good measure:

1. Corporate bonds are under pressure, a warning light for stocks.
2. BREXIT is showing clear signs of a resolution.
3. The risks with regulators looking at the FANG stocks.

ASX200 Chart

We’ve had a short-term target of ~$73.25 for CBA which was highlighted in the Weekend Report and following yesterday’s performance in the Royal Commission, plus the tumble by global equities this looks a strong possibility this morning i.e. -2.2% lower.

• We think CBA is a good short-term buy around $73.50.

Commonwealth Bank (CBA) Chart

Overnight, US stocks were smacked with Facebook leading the way as it tumbled almost -7%, dragging the tech based NASDAQ down -2.2%.

However when we stand back and look at the broader based S&P500, it continues to range trade between its all-time high and February’s panic low, this morning we closed only 0.35% from the exact mid-point of the trading range. Hence we must remain neutral just here but our preferred scenario is still a doomed attempt to break upwards towards the psychological 3000 area.

US S&P500 Chart

1 bonds generate warnings

Credit markets are sending clear warning signals to global stock markets as corporate bonds are struggling.

• Investment grade bond spreads have hit their highest level in 6-months i.e. fund managers have pulled money from riskier corporate bonds and parked it in perceived safer areas.

Basically as bond spreads widen, companies with average / bad balance sheets will underperform as the cost to fund their debt grows. Historically, corporate bonds have proven to be an excellent leading indicator for stocks.

The below chart illustrates how corporate bond ETF’s are experiencing outflows, while equities have been mixed since January’s blow-off style inflows.

Let’s put this in perspective with MM’s current view on equities:

1. We are still hopeful of a final top for stocks in 2018, but the last few weeks have certainly been testing our resolve!
2. However, medium-term we are bearish stocks targeting a +20% correction – see S&P500 chart.

Corporate & Equity ETF $$ Flow Chart

US S&P500 Chart

2 Brexit Optimism

Overnight the press announced that the UK and EU have agreed a BREXIT transition deal. This was no great surprise to us as obviously this has always been in best interests of both parties. Most importantly how does this influence our 2 main holdings with exposure to BREXIT i.e. CYBG Plc (CYB) and Janus Henderson (JHG).

Overnight the British Pound rallied which is good news for both CYB and JHG, but they are likely to both struggle today due to the overall market weakness courtesy of Facebook and US stocks.

We are comfortable with both CYB and JHG for now with CYB clearly looking the stronger.

CYBG Plc (CYB) Chart

Janus Henderson (JHG) Chart

3 FANG stocks under scrutiny

Politicians have a habit all over the world of robbing “Peter to pay Paul” in the effort to garner more votes, a cynical opinion which unfortunately is proven correct on a regular basis. Locally we’ve already seen Labor eyeing the cash component of dividend franking credits in the last few weeks, although the handouts to “buy” votes has not been forthcoming.

If there is one place that politicians / bureaucrats like to go hunting, it’s where “big fat profits” are being generated. Remember, in Australia we had numerous negotiations about a mining tax, basically at the top of the commodities cycle!

There is no greater pool of profits than the FANG stocks that have all become household names in the last 5-10 years. We question whether the glorious rally is over and they will become more mature companies with restrained growth and hence lower stock prices.

• The EU has a plan to hit tech giants with a 3% tax on revenue.
• Facebook is under huge pressure around data leaks that exposed 50 million user accounts.

Just the above 2 points smells distinctly of a market group about to be hit with higher taxes and the costly burden of increased operational regulation – just ask the banks how much the later costs!

• Our general view is the time has ended to be overweight NASDAQ stocks – or NASDAQ aligned stocks locally as we expect greater volatility / pullbacks moving forward.

Tech Based NASDAQ Chart

On a stock specific level things don’t look too bad with even Facebook’s overnight plunge hardly a blip on the radar of the last 6-years advance.

• Technically at present we would be sellers of the group into strength as opposed to panicking out just yet.

Facebook (FB.US) Chart

Google (GOOGL.US) Chart

APPLE Inc (AAPL.US) Chart

Conclusion

• We overall very cautious stocks at present due to our medium-term bearish view, however we remain keen to sell strength.

Global markets

US Indices

No major change, overall we believe US stocks have formed a low and they will be higher in 1-2 months’ time.

• While we expect US stocks to rally to fresh highs the likely manner of the advance is far more choppy / indecisive than the almost exponential gains we have witnessed from late 2016 – feels accurate at the moment.

US Dow Jones Chart

European Stocks

European indices have been lagging since late January but picked up over the last 48-hours, potentially we’ve seen their low for a few months.

German DAX Chart

Asian Stocks / Emerging Markets

We remain bullish Asia at current levels ideally targeting fresh 2018 highs in the next ~4-6 weeks – ideally the highly correlated Emerging markets Indices will trade in a similar manner, we are targeting ~10% gains.

Emerging Markets Chart

Overnight Market Matters Wrap

· The US Equities started their week on a low note, with all 3 majors down over 1.3% led by the tech heavy Nasdaq 100.

· Tonight, the FOMC meets for the next 2 days with a consensus of a rate hike 100% likely.

· Iron Ore overnight sold off, and we expect the big iron ore names to underperform the broader market as BHP in the US closed down an equivalent of -2.08% overnight from Australia’s previous close.

· The June SPI Futures is indicating the ASX 200 to open 22 points lower towards the 5935 area this morning.

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

Disclaimer

All figures contained from sources believed to be accurate. Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy. Prices as at 20/03/2018. 8.19AM

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