Markets will be looking for a positive start to the new 2018-19 financial year, the month of July, the September quarter and December half-year thanks mostly to higher energy prices.
Eurozone shares rose 0.9% on Friday helped by an EU immigration deal and US S&P 500 rose 0.1%, but the Chinese market jumped more than 2.1% after tumbling to new lows earlier in the week.
The most immediate issue is the about to start June quarter earnings season. So far all forecasts are for another rise in profits, buybacks and dividends.
Reflecting the positive global lead and a further rise in oil prices ASX 200 futures gained 23 points, or 0.4%, on Friday night pointing to a positive start to trade for the Australian share market later today.
It will still be dominated by President Trump’s trade war jaw with China, North Korea as both dominated the June quarter. Mexico’s President election yesterday will be another unknown that could rattle US markets.
And investors will have to contend with the Fed lifting rates, the UK looks like lifting rates, China has eased monetary policy and will continue to do so as the trade war with trump continues; the ECB will end its bond buying but not lift interest rates at year’s end nor will the Bank of Japan which will keep on buying bonds and shares.
Economic growth slowed a touch in Europe, China and Japan, but is still slid in the US, while Brexit is now starting to be a real negative for US investors and companies as the tough decisions approach, starting with next weekend and talks on a the key white paper on leaving the EU.
Overall the ASX did well in the June quarter and last week compared with other markets. The RBA won’t be lifting rates this year (as tomorrow’s meeting will confirm).
The last week of June saw most share markets fall, with US shares down 1.3% for the week, Eurozone shares down 1.5% despite a Friday rally on the back of an EU immigration deal, Japanese shares down 0.9% and Chinese shares down 2.7% (but almost double that before Friday’s2.1% rise).
Australian shares remained relatively resilient falling just 0.5% for the week, continuing the outperformance for the three months to June.
The ASX 200 jumped nearly 7.6% in the three months to June – making up more than 90% of the financial year’s rise. And nearly half that quarterly rise came in June with a gain of 3.4%.
ASX200 In FY2017-2018
In the latest week, the Dow fell 0.6%, the S&P lost 0.7% and the Nasdaq fell 2%. For the month of June, the Dow rose 0.1% while the S&P added 1.1% and the Nasdaq rose 1.3%. In the second quarter, the Dow gained 1.4%, the S&P was up 3.6%, and the Nasdaq gained 6.7%.
At the halfway mark for the year, the Dow has lost 1.1%, the S&P has gained 2.3%, and the Nasdaq has surged 9.3% on the back of steep gains in those large-cap and internet companies.
The US market has been driven by the large cap stocks – especially a group of tech giants but the question now is for how much longer can these giants (the FAANGs) keep this up. Some had solid June quarters, but weakened in June.
Apple shares for example are up 9.4% so far this year, but that is accounted for by a 10.3% rise in the June quarter, of which 2.7% came in June. Alphabet (Google) shares are up 6.6% year to date, but all of that and more came in the June quarter with a jump of 8.1%. June saw a dip of 0.3%.
Facebook is another whose performance was saved in the June quarter – up 10.1% for the year to date after a 21.6% surge in the June quarter which faded in the month of June to just 0.17%, much of which came from the 3.7% fall in the final week of the month.
Amazon shares are up 46% so far in 2018, with a 27% rise in the quarter and 5.5% in June. Microsoft, another tech giant has seen a 15% gain in the year so far, 8% in the June quarter, but lost 2.1% in June.
Netflix starred though – its shares are up more than 100% so far in 2018, with a quarterly gain of 32.5%.
The US dollar was up 5% in the quarter against its major peers, the Aussie dollar fell 3.6% in the quarter, 5.1% so far in 2018 and 2.1% last week.
For Warren Buffett’s Berkshire Hathaway, it has had a ‘red’ year so far – with a 5% plus slide in the June quarter accounting for the 5.3% slide year to date.
June saw a 2.4% slide as well and so far the stock is well behind the 2.3% rise in the S&P 500, which is the yardstick Buffett uses to measure his company’s performance over time.
That underperformance was partly offset by the news in the quarter that the company again lifted its stake in Apple.
But the technical factor to watch is the move by global investors out of shares and into bonds in June.
According to BofA Merrill Lynch Global Research, equity funds saw outflows of $US29.7 billion in the latest week, the second-largest single-week redemption in history.
They pulled $US24.2 billion from US-focused stock funds, the third-largest weekly outflows in history. At the same time, private-client allocation to Treasury bonds have surged to a 10-year high in 2018.
So far this year, about $US2.26 billion has been pulled from all equity-based funds (both mutual funds and exchange-traded funds), according to Morningstar Direct.
Nearly $US110 billion has flowed into taxable bond funds. This move into fixed income has come as bond yields have sharply risen. The yield on the US 10-year Treasury bond has gone from 2.38% at the start of the year to 2.83% currently; it cracked the 3% threshold and hit its highest level since 2011 in May (above 3.1%).
The dividend yield of the S&P 500 is 1.82%, which is even below the 2.52% yield of the safer US two-year Treasury note which is the bond that reacts more quickly to short term events such as day to date rate and sentiment changes.
