The fourth estimate of 2015-2016 capital expenditures will be released on Thursday and expectations are for them to increase 4.5% to A$120 billion from the third estimate. This could signify a noticeable turning point in the rebalancing of the Australian economy as non-mining investment begins to steadily expand. But China remains the biggest threat to this nascent turnaround, with the NBS PMI release on Tuesday next week likely to significantly impact the AUD and the ASX.
The Aussie dollar broke through US$0.72 for the first time since 27 October last week, and many in the markets are still playing catch up to the improvement in many of the non-mining sectors of the Australian economy. The ASX also gained 4.1% last week (+5.8% in USD terms), making it the best performing developed market. But with commodities at their lowest levels since 1999 how much longer can these gains continue?
There does appear to be a battle going on in pricing Australian related securities between the significantly distressed commodities sector and the improving domestic economy situation.
October’s employment figures have provoked a significant re-evaluation of the health of the economy. The 2.7% year-on-year increase in employment was the highest level seen since November 2010. While there are reservations in some quarters over the veracity of the ABS employment figures, the increasingly positive domestic situation has been held up in a range of other indicators. Auto sales are consistently at their highest year-on-year growth since 2013. Consumer confidence continues at a multi-year high. And the most recent earnings snapshots from David Jones and Myer point to a significantly improved consumption situation heading into the key Christmas sales period.
The interesting fact for the ASX now is that the previously highly-weighted materials sector now only accounts for 12.9% of the index. Indeed last week’s exceptional rally was driven by the 4.6% gain by financials, 5.1% from telcos and 6.7% in energy. Clearly the high-yielding banking stocks were finding buyers as the volatility index fell to 17.9 last week. So much of the future prospects for the ASX is now driven by perceptions of the financial sector with its 48% market cap weighting. This is concerning as roughly A$31 billion of capital raisings by the banks are expected by mid-2016 to be in line with new capital requirements.
Materials having less of a drag on the ASX:
The Peoples’ Bank of China (PBOC) fixed the midpoint for the USD/CNY at 6.3867, its weakest level since 31 August. With China’s October CPI coming in at 1.3% and the Fed likely to hike in December, the likelihood of an easing in the CNY has been rising. The CNY is de facto pegged to the USD so the dramatic rise in the US dollar index in the wake of their last Fed meeting has seen the CNY similarly appreciate against other currencies, making a strong case to devalue the currency.
Today’s easing has brought these concerns to the FX market again. The CNY easing has seen the dollar index rally to its highest level since April 2013. This prompted a further selloff in commodities, with gold losing 0.7%.
The big Chinese devaluation in August prompted a major selloff in global equities and commodities, and concerns are that a devaluation could spark a similar reaction this time around.
Currently, these China concerns and reflexive US dollar buying in reaction to the easing have prompted major selling in the Aussie dollar as it lost about 0.9% in Asian trade.
ASX
The ASX was remarkably resilient as commodities continued their decline in Asian trade and China’s weakening of the yuan added to global growth concerns. Today’s performance of the ASX really emphasises how the dramatic selloff in energy and materials companies has dramatically re-aligned the weighting of the index. Even though materials fell 1.3%, the index as a whole managed to gain 0.3%.
Myer’s surprisingly strong sales growth announced last week continued to buoy the stock, and also helped improve sentiment around consumer stocks in general. The strong sales reported by both Myer Holdings Ltd (AX:MYR) and David Jones recently has clearly helped consumer stocks, with the consumer discretionary sector gaining 1.5%. Further rumours that Woolworths Ltd (AX:WOW) may be tempted into selling Big W off to private equity also saw its stocks gain 3.2%.
Key for the index was steady buying support for the banks. After a tenuous start, the banks largely kept in positive territory throughout the day. With the banks returning to much reduced valuations and concerns about a further selloff in the market ebbing, investors’ desire for yield appears to be winning out again.
The healthcare sector looks in rude health after it has gained 7.6% over the past month. Most indicative of this is CSL's (AX:CSL) recent performance. The stock’s heavy market cap weighting in the index means its performance has a large influence on the sector as a whole. This makes it particularly significant that the stock is trading A$99.2, its highest level since 7 August, and not far off its highest ever close of A$101.13. The healthcare sector as a whole gained 0.8%.
