XJO up 333. Hitting all time

Bulls in Control

The Australian market, building on a consolidation that had been developing since October 2019, had it’s best January in 30 years, with the ASX rising a phenomenal 5.2%.

From the 1st trading day of the month, till the 20th of Jan, the market went up for 13 sessions (only down twice) and in the process creating 7 new all time high’s, breaking through the 7000 mark on the 16th, before peaking with an all time high of 7145 achieved on the 22nd.

With the US/China Phase 1 trade deal finally out of the way, combined with rising tension in the Middle East, commodities and resources rallied across the board with gold hitting 6 yr high’s, Iron Ore & Oil hitting yearly highs all benefiting the resource and mining sectors.

The international resource rally supported by the recovering financials XFJ, and continued support by the Health Care XHJ,  Info Tech XIJ , Communications XTJ, combined to create the perfect conditions for the best January in a generation.

However, the party stopped as potentially a new “Black Swan” circled the markets, with the announcement of a new deadly virus called the Coronavirus causing the market to drop off sharply from the 23rd causing  a pull back for the remainder of the month closing at 7,017.

Best January Index’s

• XHJ -Health Care :  12.42%
• XIJ- Info Tech: 10.25%
• XTJ- Communications:8.52%
• XSJ- Consumer Staples : 7.71%

KEY ECONOMIC DATA

• China Manufacturing beat expectations
• Aus PPI – Beating Expectations
• Australian Unemployment rate dropped to 5.1%
• Australian Trade Surplus increased to $5.8 b
• Australian Economy grew more than expected

DJI 12 MONTH CHART

Dow Jones Industrial Average continued from where it left off last year, opening the first trading day of the year with a 100 point gap up, setting a new all time high.

Propelled by robust domestic and international economic news, and the positive ramifications of the US/China trade deal Phase 1for US companies, the market went on a strong rally till the 17th setting a series of intra day and all time high’s both for the DOW and the S&P 500, which broke through the 3,300 level for the first time.

However, stories of a new virus emanating from China provided profit takers with a reason to sell sending the market in a downward direction. Despite phenomenal US Durable goods orders ( which came in 5 times expected – the most I’ve ever seen in 30 years) providing support from the 27th till, the 30th, the true scale of the Coronavirus outbreak caused a 603 point drop on the final day of the month, wiping away the entire months gain in one session, to finish the month at 28,256.

US Reporting Season Highlights

The US reporting season started phenomenally and has continued to beat market expectations, with 70% of S&P 500 companies beating market expectations. What is more interesting, is that we are potentially looking at the 5th consecutive quarter of S&P 500 companies profit reports, beating market expectations, which has never happened posy WW2.

• Apple Hit record all time high
• Alphabet (Google’s parent company) topped $1 trillion valuation
• IBM beat Market Expectations
• Intel beat Market Expectations
• JP Morgan Beat Market Expectations recording record annual profit

Key Economic Events and Indicators

• US unemployment steady @ 3.5 %
• US Trade Deficit Shrank to $43.1b
• US Housing Starts Surged for 3rd month in a row
• US Durable Goods orders beat market expectations
• US GDP 2.1%: Steady

Coronavirus Report

The Coronavirus spreading from China has certainly taken the gloss off the markets since the 23rd of January, pushing all other market headlines to the back. Fundamentally, it is important to remember, that although this is a fluid (real time) situation with an end not in sight, historically viruses have had very short term and limited impact upon stock markets.

However, what are the risks and potential beneficiaries of a virus such as the coronavirus upon stock markets.

Corona Virus – STock Market Risks

China’s economy : With the virus potentially already broken out, new cases and deaths being reported every day in new cities in China, it is simply impossible to gauge the extent of the potential damage to the Chinese economy. With one city already closed down, what will happen if China starts “closing down” hundreds of cities? What is important to understand is that China has a variety of social order tools available that simply would not be possible in the West. They have the capacity to close entire industries and provinces down. If the Chinese authorities deem the risk to the greater work force to great they could literally overnight stop all manufacturing/production, and simply keep on a skeleton crew to maintain the electricity grid. What impact would that have on commodity prices, and the world economy; some economist are already predicting that China’s GDP will drop to around 2%.

Force Majeure: Potentially the biggest risk facing Australia’s exporters would be if the Chinese govt declare Force Majeure for all commodity based contracts (Coronavirus would legally fall into the category). All exports to China of commodities would simply stop. Maybe for 4 weeks, maybe 6 months, we simply wouldn’t know, resulting in a large impact upon individual company profits, but also Australia’s economy and budget.
Oil: This will be impacted immediately, offsetting any supply concerns emanating from the middle East. Oil demand would/could/will drop dramatically causing prices to drop.

Travel Stocks: Airlines/Airports and travel companies will be severely impacted, with the possibility, that should the contagion be larger than anticipated that some companies may go into liquidation.

Beneficiaries

Health Care sector would potentially be the clear beneficiary, however sectors in general that are not export driven and viewed as “defensive in nature would also likely benefit from institutional re allocation. High paying dividend stocks may also benefit as a “defensive play”.

OIL PRICE UPDATES: Coronavirus fear impacts International Oil Markets

WTI Crude – Dropped $9.46 : $61.09 – $ 51.63

January initially started out where December left off, with the first 8 trading days seeing Oil rallying to the highest level since April 2019.

This was due to the assassination of Iran’s top general Soleiman, and the expected response by Iran plunging the middle East into conflict, and potentially impacting Oil supplies.

However, as the month went on, and Iran’s muted response of a few missiles at an empty US base in Iraq, the “Middle East Risk factor ” eased out of the market, and traders began to focus on fundamental production and storage data.

With the advent of the Coronavirus out break in China leading up to CNY, profit takers quickly moved creating a multi session 15% drop in the drop of Oil.

From the 24th on the market effectively continued to move south, as the market digested the potential economic impact that the Coronavirus may have on world Oil demand, with Oil settling the month at $51.63.

Key Oil Price Influences

• US Achieved consecutive record Oil production -13 mbpd
• US/ China Trade Deal surprised markets with Oil component
• Libya Shut down Oil production facilities
• Both Iran & Iraq experienced domestic rioting aimed at the government