What we liked

  • The ASX 200 Index closed the week at a 10 year high recording its fifth straight gain closing at 6118 points. Oil and energy stock surged higher following the threat of sanctions on Iran which caused a spike in the oil price. But at the same time the number of US oil rigs rose from 825 to 834 which could place a cap on the price of oil in the medium term. In Australia the NAB Business condition survey rose to its highest level since March 1997. It means Australian economic growth looks set to strengthen with the mining and finance sectors doing well. Conditions improved for all sectors except retail.
  • Self managed superannuation funds (SMSFs) were largely left out of this year’s budget, a relief for SMSF trustees. The Labor party’s proposed changes to remove the refund of tax paid on franking credits was also left alone and was not touched. Changing such rules will have penalised investors who held high dividend paying shares and penalised retirees who rely on the income generated from these tax refunds. The status quo is maintained.
  • The strong message delivered by the Hayne Royal Commission to all vertically integrated financial advice providers is that their model under which they manufacture and sell their own products, is broken and in jeopardy. Whilst AMP’s reputation has been most heavily hit, the problems are widespread throughout the Big Four Banks. ANZ has taken the first step in regaining public trust by scrapping sales bonuses paid to its financial planners for pushing bank products. Banks have been too slow to address these issues in the past but after the Royal Banking Commission, change on the way.
  • US unemployment has dropped below 4% for the first time in 18 years, but wage growth is still subdued. It’s almost a near certainty that the US Federal Reserve will now raise rates at its next meeting. Nonfarm payrolls rose by 164,000 in April a touch lower than an expected 189,000. Jobless rate fell from 4.1% to 3.9% beating expectations for 4.0%. Economists are hoping that a cut to the corporate tax rate will help with wage growth going forward.
  • Challenger (CGF) – The federal budget’s retirement income reforms have provided a boon for annuities. One of the beneficiaries from this budget was Challenger, after the Government announcement plans to encourage development of post retirement products such as annuities. Challenger’s main offering are annuities which are simple, secure financial products which provides a retiree with a series of regular payments in return for a lump-sum investment. CGF shares rose by more than 5% on Wednesday following the budget’s recommendations.

What we disliked

  • ASX confession season has started and a few companies have already downgraded (confessed) their earnings forecasts, preparing the market for a disappointing year right before reporting season. Downgrades have so far come from Boral, JB Hi-Fi, AMP, BlueSky, Gateway Lifestyle, Ainsworth Gaming Tech, Fleetwood Corp and Greencross. This year there has been an increase in class action activity that could prompt further downgrades from companies wanting to get the bad news out of the way, rather than riding out confession season. Downgrades could be early indication of a weakening economy.
  • CBA has settled a Bank bill swap rate rigging case that was brought against it by ASIC. The bank will pay a fine of $25m in penalties and costs. NAB and ANZ also settled the BBSW case with ASIC, while WBC is fighting the allegations. A decision is due soon on the WBC proceedings. At the same time, CBA issued a trading update. Underlying operating income for the quarter was down 4% and operating expense was up 3% driven by regulatory and compliance project spends.
  • House prices have peaked and are slowing. The property boom is over. Melbourne recorded its lowest quarterly growth in five and a half years with growth of just 0.1%. Property prices in Sydney fell by 0.4%. CoreLogic found that property prices across the capital cities recorded an annual decline of -0.3%. It seems tighter lending standards are starting to bite along with an oversupply of apartments and foreign buyers pulling out. It’s creating the perfect storm for a property collapse in Australia’s two big cities. A collapse is a negative for not only the property market but for the broader economy and the banking sector.
  • US President Donald Trump’s has withdrawn from a nuclear agreement with Iran and will look to reinstate sanctions on the country. His move has sent oil prices soaring hitting fresh 52 week highs. By placing sanctions on Iran it will remove 1 million barrels a day from the global market. It comes when OPEC and Russia are already cutting supply, sending the oil price even higher. Whilst the move is a positive for oil stocks, higher oil prices mean high prices at the pump. Over the longer term it’s a negative for consumer spending and it could offset gains from the US tax cuts. European oil refiners and trading houses will begin cutting purchases of Iranian crude. Trump has given buyers 180 days to wind down imports.