What we liked
- Reporting season is over and overall it’s been a good one. Earnings estimates for 2017-18 and 2018-19 were largely intact with more upgrades and earnings beats than downgrades and earnings misses. The Australian market is on track to report 6.6% earnings per share growth this fiscal year and 5% in 2018-19. US stocks had a volatile week falling 1,110 points or 4.2% after the Federal Reserve became bullish on interest rates and wages.
- The Australian sharemarket closed the week down 1.2% due to the threat of a trade war from Washington. US president Donald Trump caused a global equity market sell-off when he called for new tariffs to be imposed on US imports of steel and aluminium. US tariffs on steel and aluminium imports will cost Australian jobs and set off retaliatory trade bans that could harm the global economy.
- New US Federal Reserve chair Jerome Powell sees little risk of a US recession and is bullish on the economy. Powell made his debut public appearance this week and said the US economy has strengthened and corporate tax cuts should help deliver higher wages over time. Whilst he didn’t issue a firm growth estimate, he noted that the economy grew at about 3% in the 2H17. Powell also confirmed further gradual rate increases were on the cards in 2018. The market is now pricing in more aggressive US interest rate increases with bond traders upping bets for three US rate rises this year to a 75% and a possible fourth rate rise at 35%. The 10 year bond yield is sitting at 2.92%.
- Algorithmic or high-frequency traders have been put on notice by UK authorities. These computer software programs automatically place an order in financial markets, without human intervention and have become a sizeable volume on stock markets. The Financial Conduct Authority (FCA) published a report on the supervision of algorithmic trading in wholesale markets. It said that firms need to do more work to identify and reduce potential conduct risks created by their algorithmic trading strategies. It didn’t propose new rules but will “proactively” supervise and monitor algorithmic trading. It’s a positive move by the UK watchdog. Algorithmic software is too often poorly designed and monitored, leaving share markets open to disastrous mistakes and market abuse that can spiral out of control.
- The ATO has issued a warning to Bitcoin investors dodging tax that they will be caught. It will use full investigative powers and anti-money laundering legislation due to come into force next month as the basis for a long-awaited blitz on cryptocurrencies. The ATO’s move against Bitcoin is part of a growing international movement to crack down on Bitcoin tax avoidance most notably in the US.
What we didn’t like
- In South America, talks are underway to privatise the Guarani Aquifer. This one of the world’s largest reserves of fresh water. The deal could see a consortium of US and EU based conglomerates gain exclusive rights to use the aquifer for the next 100 years. It is estimated that this aquifer is capable of providing the world’s population with drinking water for up to 200 years. Nestle is part of the conglomerate that had established a zero-tolerance policy on land grabs. The company said “Nestlé is against all forms of land acquisitions that are illegal and/or have an adverse impact on local communities’ livelihoods.” Humanity will be affected by the decision to privatize the second-largest aquifer system in the world. Essentially, the corporations are profiting off a natural resource that should be freely available to all.
- Warren Buffett has issued a warning to investors about bondholder risk. He urged long-term investors not to measure portfolio risk by the ratio of bonds to stocks. His message was to challenge the view of how investors look at investments in the bond market as being safer than investments equity markets.
- Troubled company Retail Food Group (RFG) has announced it will shut as many as 200 stores. A six-month review of the store network by Deloitte had revealed between 160 and 200 stores were not sustainable. That means about a third of the company’s stores are owned by RFG. It has set aside $37.5 million to get out of the leases on the outlets. Shares have been hit hard year to date falling from $5.64 to $2.04.
- The Sydney property market has fallen for the first time over a 12-month period since the housing boom began. Sydney recorded a 0.5% fall in housing prices in the year to February with the median property value at $880,743. Over the three months to February, Sydney prices fell 2.4%. This was the weakest result in the country. Melbourne was down 0.4% for the last three months. Its median dwelling price is now $723,334. It too is slowing. Whilst it’s good news for new home buyers, it can turn into a negative if we see a hard landing. Australia has such high levels of household debt and with housing prices now falling and rates tipped to rise, we might see borrowers struggle to make repayments.