Trade War – What Trade War? (BHP, RIO)
A reasonable day for the Australian benchmark yesterday, buoyed largely by strength in the consumer discretionary stocks while the resources also showed some promise. Overnight U.S. stocks edged higher although unconvincingly so with a mixed bag of earnings and a sharply higher Oil price, however it was in the commodity complex that we really saw things heat up - nickel the standout adding ~8% , breaking out to new 3 year highs. Expect a very bullish day for our mining stocks with BHP likely to open up just below $31.00.
SPI Futures are pricing a rise of around 25 points on open however that may be ‘undercooked’ given the strength in both resources and banks overseas.
We still need a close back above 5900 before we can see a real possibility of a test of 2018 highs, while a failure to hold the 5800-support area will concern us. Remember at MM we are cautiously bullish stocks from current levels, but definitely not chasers of strength.
The resource stocks have started to perform strongly, however our very influential banks have continued to lag. It’s simply very hard for our market to be overall bullish unless our banks join the party – something that has been very illusive for the usually strong months of March and April.
ASX 200 Chart
Today’s report is going to take a review at a few important aspects of the market as investors look past recent trade tensions and geopolitical rumblings and instead embrace strong corporate earnings – an air of stability returning to the markets, for now.
Overseas Markets
The US market was up for a third straight session overnight with the tech stocks once again seeing most buying – although only by a small margin. We continue to use the NASDAQ as a strong leading indicator for global equities / risk appetite and expect an eventual re-test of the previous highs, as long as Trump and Chinese President Xi Jinping can progress trade discussions with the more conciliatory approach that seems to be currently playing out. Trump came out firing on trade however China’s response has clearly taken the wind out of the Trump sails – for now.
NASDAQ Chart
Volatility has abated fairly quickly to now trade back below its longer term average but still above the level it traded for much of 2017. The market is now suggesting that all is calm. If the status quo is maintained, expect volatility to drift lower but stay above the 10 handle. Right now, 15 on the volatility index feels about right.
Volatility Index Chart
US interest rates continue to edge higher and the 3% level on the 10 year bond seems simply a matter of time. The US economy continues to perform strongly with the recent tax cuts now showing through into strong earnings. An interesting component of the Goldman Sachs quarterly report was a big increase in wage costs aligned with an increase in earnings. Higher earnings typically flow to higher wages which underpins rising inflation, and ultimately higher interest rates.
US 10 year bond yield
The Emerging Markets, which are highly correlated to our resources sector, also enjoyed a strong night rallying nearly 1%. We remain bullish the EEM targeting fresh 2018 highs, a bullish sign for both local heavyweight BHP and RIO.
NB Overnight BHP closed at $30.89 in the US, up a healthy +2.67%.
Emerging Markets (EEM) ETF Chart
BHP & RIO
Now to again look at these two stocks given recent strength. BHP is our larger weighting in the Growth Portfolio at 6% while we hold 3% in Rio – both positions are in profit. While we remain bullish on the commodity stocks our original plan has been to sell strength and Rio in particular is likely to be strong today.
We expect to sell RIO above $80 today should it trade there.
BHP closed yesterday above $30 which brings into play our $32 price target – now just ~6% away. By taking a nice profit on our smaller holding in Rio Tinto (RIO) – hopefully today – we can then give our larger BHP position more room to move. NB. We have BHP in both the Platinum & Income Portfolio’s.
Rio Tinto (RIO) Chart
BHP Chart
Conclusion
· We remain sellers of strength and today we are looking to sell Rio Tinto above $80 should it get there, giving BHP more room to move
**Watch for alerts**
Market Matters Overnight Wrap
· The SPI is up 25 points as the S&P 500 and NASDAQ made small gains and despite the DJIA closing slightly in the red.
· Britain’s FTSE 100 rallied 1.25% as the pound fell on weak inflation numbers, while resource stocks surged with BHP and RIO rising circa 5%.
· Sanctions on Rusal are continuing to disrupt the base metals market with huge gains on the LME. Aluminium rose to its highest level since 2011 and nickel jumped 7.5%.
· Iron ore rose 2% while oil rallied 3% to a three year high and helped energy stocks to be among the best performers in the US.
Have a great day!
James & the Market Matters Team
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 19/04/2018. 9.05AM
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