The Golden Goose

POSTED BY ANGUS GEDDES

US stocks found a bid on Tuesday after oil rallied strongly, lifting the energy sector, after a firmer showing in Asia. WTI oil lifted 4% to close back above $70, while GE had its best day in three years, lifting 7% after first time inclusion in the S&P500. Energy was the strongest performing sector, climbing 1.4% as Washington pushed allies to halt imports of Iranian crude. The DXY firmed while the Volatility index declined 8% to back below 16. The Trump Administration received a boost from the travel ban which targets certain countries, being ruled valid in the Supreme court.

The major US indices closed modestly higher on Tuesday. The tech-heavy Nasdaq led the way back, advancing 0.39% after being hit hard on Monday. The S&P500 posted a 0.22% gain and the Dow edged up 0.12%. The small-to-mid cap and more domestically focused Russell 2000 index gained 0.66%, while the trade-sensitive Dow Transports slipped 0.44%.

Atlanta Federal Reserve bank president Raphael Bostic said on Tuesday that “intensifying trade tensions over the last week have raised the risks to the US economy.” He went on to say that this may “rule out a fourth rate increase for the year if the developing trade war gets worse. The more it progresses in this more contentious way, the more it leads me to feel the risks are on the downside for the broader economy. If this progresses the way it has been the last couple of days there is some likelihood I will be moving away from four as a real possibility.”

This statement follows Fed chair Jerome Powell who at a conference in Europe last week indicated that the looming trade war may affect the Fed’s outlook. For the Fed to back away from the tightening of monetary policy if trade tensions escalate would be a good thing. I still see the US economy as being Trump’s key pillar for securing the mid-term primary elections later this year.

If the US economy “tanks” because of a trade war and takes the global economy with it, it would be hard to see how the Republicans will prevail in November, let alone Trump landing a second term in 2020. Killing the golden goose that lays the golden eggs is not the answer. I still think his strategy is all about “point scoring” and appealing to his electorate support base, but at the same time averting an “all out” trade war which Trump must certainly understand is a negative sum game. 

The major Asian equity indices finished mixed on Tuesday. The benchmark Nikkei index was effectively flat (-0.02%) in Japan after erasing early losses, with some reported short-covering activity. Banks and shipping companies advanced, but as in China an overall feeling of caution remains as investors fret that the US and others will not avoid a damaging escalation of trade impediments.

Discount retailer Shimamura Co saw its stock tank about 16% after posting a 32% fall in first quarter operating profit. On the other hand, department store owner and operator Takashimaya, known for its ritzy Ginza store in Tokyo, edged up 1.8% after delivering a 5.7% increase in quarterly profit. We do not hold either stock. The megabanks Mizuho, Sumitomo and Mitsubishi UFJ posted modest gains of between 0.5% to 1%.

The CSI300 has fallen 20% which has corrected approximately half of the upward advance between early 2016 and January of this year. While further downside could be sustained I think the worst of the decline is probably over with the Chinese Central bank easing credit and interest rates. 

 CSI300

In Hong Kong, despite the bench mark index falling, lens maker Sunny Optical, chip fabricator Semiconductor Manufacturing International and Macau casino operator Wynn Macau bucked the trend with solid gains of 2.8%, 2.7% and 1.6% respectively.

The banks efforts to optimise their balance sheets, and adapt to a new environment is stimulating M&A action. It has been reported that QBE Insurance is amongst those considering a bid for CBA’s general insurance unit. QBE itself however has been looking to simplify its operations so I am not sure that this would be the best time to make a move, particularly if strong competition pushes up the price. QBE is still very much work in progress as a turnaround story, but the rising yield curve and inflationary pressures should eventually provide meaningful tailwinds to QBE’s bottom line.

Disclosure: The Fat Prophets Global Contrarian Fund declares a holding in: Mizuho, Sumitomo, Mitsubishi UFJ, Sunny Optical, Wynn Macau and QBE.

Carpe Diem!

Angus
CEO | Fat Prophets
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