Weekly review: 2019 starts the way last year left off

2019 stock market ASX Apple Gold Interest rates
WEEKLY MARKET REPORT

The new year has seen the ASX 200 drop 0.48% for the week to close on 5,619.4 points.

Perhaps not the start most investors were looking for as uncertainty still hangs in the air on many fronts as to where the global economy is headed next.

The current downtrend in stocks looks to have eased somewhat, however there are no fundamental signs that the bottom is in place.

ASX 200 chart January 2019 share market drop
The ASX 200 has broken its upward trend.

With that said, the year has only begun in what looks like will be another period of volatility favouring traders over the sit and hold investors.

Current Federal Reserve chairman Jerome Powell delivered a talk yesterday along with former heads Janet Yellen and Ben Bernanke.

The key takeaway being that the Fed will be more flexible with future monetary policy, translated, this means that if the market continues to sink they will not go ahead with the planned interest rate rises in 2019 and could even cut rates if necessary.

US stocks responded by rallying with the DOW finishing the trading session up 3.29%, also supported by better than expected jobs numbers, which will likely see the Australian market open strong on Monday.

Apple falls from the tree

Earlier this week Apple sent markets into a tailspin after reporting that sales of its iPhone in China are slumping and announced a cut revenue forecast.

While it’s true that the Chinese economy appears to be slowing, with manufacturing numbers out of China on the slide, the fact is larger companies that are relying on brand equity are finding it tough in the brave new world where cheaper and just as good alternatives exist.

The once US$1.1 trillion dollar company now has a market cap of US$703.5 billion.

Apple has tried to maintain its premium branding despite offering nothing ground breaking in recent years in terms of features and products.

If anything, many of its products are now designed so that a consumer must purchase equipment unique to Apple that is overpriced, frustrating once loyal Apple consumers.

Once known for its innovation and boldness to challenge the status quo, Apple is now milking what brand equity it has left as support for its brand is clearly waning, with Huawei recently pipping Apple for second place for most phones sold around the world last year, Samsung being in number one place.

So while Apple CEO Tim Cook is blaming the Chinese economy for its poor results, the 41% growth Huawei experienced in Q2 of 2018 could just as easily be argued as the reason for Apple’s fall from grace, as consumers, particularly in China, make the switch to alternative brands that offer similar products that are often cheaper and offer more value in terms of features.

Christmas and Boxing Day sales to disappoint

In what may prove to be the canary in the coal mine for a poor Christmas period for retail sales, Kathmandu (ASX: KMD) delivered an updated lacklustre profit guidance this week sending its stock price down 15.06% to $2.20 per share.

The pain was felt by others in the retail space following Kathmandu’s release as investors braced themselves from a likely disappointing sales period, JB Hi-Fi (ASX: JBH) shares fell 10.67% for the week and Myer (ASX: MYR) down 7.06%.

New car sales slump

Seen as a leading indicator of the state of the economy, new car sales are down.

Data from the Federal Chamber or Automotive Industries shows that new car sales in Australia fell a whopping 14.9% in December of 2018, when compared to the year prior.

A total of 87,528 vehicles were sold, down 15,292 from December 2017.

Leading the sales slump was Tasmania down 20.6%, New South Wales down 19.7% and Victoria down 17.9%.

For the entire year, 1,153,111 vehicles were sold, down 3% from the record set in 2017. While the overall figure on a yearly basis is not much of concern, a major fall heading into 2019 may well be.

With housing prices in Australia on the slide it’s unlikely to see any major increase in new car sales soon as the public moves to a more conservative mindset.

Gold continues to shine

It’s not all gloom and doom if you know where to invest, Gold stocks have continued their run with the precious metal almost breaching the US$1,300 per ounce barrier this week.

Gold producers have enjoyed the rally in the underlying commodity in recent months, Evolution Mining (ASX: EVN) up 45.52% in the past 3 months, Newcrest Mining (ASX: NCM) up 21.41% over the same time frame.

According to the US Mint, gold and silver sales in 2018 were the lowest they’ve been in 11 years, with gold prices bottoming in August at US$1,160p/oz as the bulls all but capitulated.

In total, only 245,500oz of gold American Eagle coins were purchased in 2018, down 18% from the year prior. Silver American Eagles also down with 15,700,000oz sold down 13%.

Taking advantage of the lower prices however where many eastern nations, including Russia and China who continue to acquire physical gold at a record pace.

According to the World Gold Council, in November of 2018 Russia cracked into the top five nations for gold holdings with 2,036 tons in reserves.

The largest holder the United States with 8,133 tons, Germany with 3,369 tons, Italy with 2,451 tons and France with 2,436 tons.

China has a reported 1,842 tons in gold holdings, however that figure is largely suspected to be actually far higher, with the Asian nation playing its cards close to its chest and likely providing a low-ball figure to the market with some pundits forecasting the yuan will one day be backed by gold.

Meanwhile the holdings for the US are suspected by some to be over inflated and that the gold reportedly at Fort Knox is simply not all there and has been rehypothecated into the system.

As we noted recently, 2019 is shaping up to potentially be a breakout year for gold, with the prices in Australian dollars piercing A$1,848p/oz this week.

Gold prices in AUD are looking to head to new all-time highs having seemingly broken out on the charts on a technical basis, coupled by a weak Australian dollar.

Interest rate hikes impacting the market

Tightening of the monetary supply by the Federal Reserve is sending markets down across the board. While the Fed recently stated it will only lower rates twice, not three times as originally planned, in 2019.

It is highly unlikely that the Fed will be able achieve these rate rises without sinking the equity markets and hence taking down the economy with it, sending us into another recession.

Cheap money due to record low interest rates, and quantitative easing, has driven up the markets since 2008 and now that the tap is being slowly turned off we can expect to see the flow of money in the economy dry up.

Note that the Federal Reserve is no more federal than Federal Express (FedEx).

It’s a private for profit run company that has the power over the world’s reserve currency and hence nations around the world.

Something that is unlikely to continue far into the future and may be the reason why countries like China and Russia are hoarding gold for this future event that is seemingly inevitable.

The week ahead

Markets are still relatively quiet coming into the new year, expect another week of slow news from companies as many directors are still on holidays.

On the macro front, an updated figure on Australia’s trade balance is due out Tuesday with $2.156 billion forecast.

Building approvals for November are expected to come in at -2.0% on Wednesday, with business and consumer confidence numbers out later in the week.

Retail sales numbers for November come out on Friday. Sales growth of 0.4% is forecast for the month, having been 0.3% the same time year prior.

A lower than expected number could see retail stocks hit on Friday, as investors would fear the already anticipated slower than expected Christmas sales results. Alternatively, a positive number could offer a bounce in the retail stocks that already took a hit this week.

Overseas news to look out for is inflation data out from the US and China late in the week.

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Filip has written in both Australia and abroad covering the global economy, geopolitical issues, commodities and small cap stocks on the ASX. He also has many years experience as a share market trader.