Weekly review: doves party with the bulls as rates fall and markets rise

Dovish bull rates fall markets rise ASX Federal Reserve
WEEKLY MARKET REPORT

Once again, the doves and the bulls are combining to have one heck of a party – even if the real economy still looks quite tepid.

In the US – still the biggest influence on world markets and particularly Australia – Fed Chairman Jerome Powell has confessed that after a brief foray into raising interest rates he has grown wings and turned into a dove.

He all but told the US Congress that he was going to cut interest rates at the next meeting with possibly up to three cuts over the next six months – something of an embarrassment given that the US inflation number later pointed more to an economy that is still quite strong, with an annualised rate of 2.1%.

US jobs number strong but slowing

Other numbers within the US economy are a mixed bunch.

The jobs market is still strong but the number of jobs being added is slowing and consumer confidence remains high, but is not improving.

None of it really mattered for the bulls on Wall Street as they once again embraced the dovishness and pushed the US share market close to all-time highs, on the basis that when the Fed starts cutting rates, stocks usually rally for the following year.

The Dow Jones Industrial Average saluted by pushing through the 27,000 point mark for the first time in its history – to be greeted with the now inevitable Trump Presidential tweet.

The more useful US share market benchmark, the S&P500, is wandering around at the key 3,000-point level, which again is very much in record territory.

Australia even more confusing

Here in Australia the picture is, if anything, more confusing.

The real economy continues to show signs of weakness, as shown by a number of economic releases this week.

Despite the unexpected return of the Morrison Government, tax cuts which have sparked a rush of early tax returns and a couple of successive interest rate cuts, the forward-looking indicators are still fairly bleak.

Consumer confidence slipping

The Westpac-Melbourne Institute measure of consumer sentiment slipped 4.1% in July with consumers gloomy about their personal finances, the economy and their job prospects.

That means consumer confidence has dropped to a two-year low despite tax cuts and lower mortgage interest rates, both of which would normally have been expected to buoy consumers.

All told, it is not looking good for retailers preparing for the key mid-year sales.

It is a similar scene on the housing market, despite signs that house prices are finally levelling out.

The Australian Bureau of Statistics reported a 5.6% drop in the March quarter in the number of new dwelling starts, coming hot on the heels of a 12.3% drop in the December quarter.

Over the past year work has started on 209,508 new houses and apartments, a 7.4% drop and more than 10% down on the peak recorded at the end of 2016.

Starts in NSW fell by 15.9% in the March quarter and in Victoria by 9.2%, with apartment starts tumbling by 42% from their peak, compared to a 9% fall in new houses.

The only positive news for the week was in the tourism sector with tourist arrivals up by 6.3% in May, which is the biggest monthly lift in international visitors since April 2017.

The lower Australian dollar might explain some of this inbound tourism but not the increase of Aussies who are continuing to travel offshore which lifted by 5.8% – the biggest monthly increase since May 2011.

Migration to Australia also hit a record high of 848,570 people, up by 5.7% over the year to May, which should eventually be a positive for the property market.

Share market ends week lower

Perhaps appropriately on the basis of the weak tone set by the local economic data, the ASX 200 index fell 54.8 points for the week, losing 0.8% to 6,696.5 points.

The broader All Ordinaries index lost 43 points, or 0.6%, to end the week at 6,788.8 points, so once again both indices pulled back a little from the potential of finally rising to all-time highs recorded way back in November 2007.

Mining stocks were a real drag on the market as gold, iron ore and oil prices all fell.

Most of the market heavyweights will release quarterly updates next week, including BHP (ASX: BHP), Rio Tinto (ASX: RIO), BHP offshoot South32 (ASX: S32), Woodside (ASX: WPL), Santos (ASX: STO) and Oil Search (ASX: OSH).

Bond proxy stocks were also broadly weaker after the Australian 10-year bond yield rose strongly.

That saw a lot of property related stocks fall such as Goodman Group (ASX: GMG) down 4.4% to $15.36, Scentre Group (ASX: SCG) down 5.6% to $3.90, Sydney Airport (ASX: SYD) down 3.6% to $7.97 and Dexus (ASX: DXS) down 2.6% to $13.54.

Nearmap (ASX: NEA) shares fell heavily despite reporting a record portfolio growth and a result in-line with its previous guidance, with its shares down 9.2% for the week to $3.34.

Nearmap said it had grown the value of its North American contracts by 76% in a year, with the segment now representing a third of the aerial imaging company’s business.

Afterpay (ASX: APT) shares also slid on the back of broker downgrades after a stellar run, with its shares down 8.8% to $24.48 for the week.

Charter Hall Group (ASX: CHC) was down 0.4% to $11.70 after it said it would buy Telstra’s (ASX: TLS) 47 storey global HQ tower in the Melbourne CBD for $830 million.

G8 Education (ASX: GEM) shares fell heavily on the back of broker downgrades with its shares dropping 10.7% to $2.74.

Small cap stock action

Despite a 0.53% fall on Friday, the Small Ords index continued its rally this week, finishing up 1.05% on 2,907.8 points.

ASX200 ASX Small Ords chart July 2019
ASX 200 vs Small Ords

Small cap companies making headlines this week included:

Eden Innovations (ASX: EDE)

It was a big week for Eden Innovations with the company dispatching its first EdenCrete order to its Australian and New Zealand distributor Parchem Construction Supplies, while also revealing the American Association of State Highway Transportation Officials (AASHTO) had certified two of its products.

Parachem’s order follows trials of Eden’s EdenCrete concrete additive products within Australian cements, slag and fly ash.

Eden anticipates commercial orders for the concrete additives in Australia and NZ will grow over the coming months.

Meanwhile, EdenCrete and EdenCrete Pz products were both certified as complying with AASHTO standards and Eden will now apply to all US state departments of transportation for EdenCrete and EdenCrete Pz to be added to their approved or qualified products lists.

Family Zone Cyber Safety (ASX: FZO)

Family Zone Cyber Safety declared an “exceptional” June quarter after reporting 173% quarter-on-quarter growth in the value of its contracts sold to schools.

At the end of the period, Family Zone was present in 839 schools and had 482,000 licenced student users.

The US market has been the biggest contributor to Family Zone’s growth with US sales rocketing 175% in the three months ending June and the technology present in 402 US schools.

Throughout the remainder of 2019, Family Zone will be rolling out its Insights and SpotShield platforms across its clients.

VRX Silica (ASX: VRX)

Days after debuting an updated resource for its Arrowsmith North silica sand project, VRX Silica has collared a memorandum of understanding with China’s largest glass manufacturer.

Earlier this week, the Arrowsmith resource was boosted 398% to 771Mt at 98% silicon dioxide.

This was followed by an announcement that China Southern Glass Holding (CSG) had agreed to a strategic alliance over VRX’s Muchea silica sand project north of Perth in WA.

The alliance with China’s largest glass manufacture will include promotion and sale of Muchea silicon sand products in China and potential sourcing of capital finance required to bring Muchea online.

Both companies will also evaluate the viability of building a glass manufacturing facility in WA.

Mach7 Technologies (ASX: M7T)

Mach7 Technologies unveiled a software and services agreement with US healthcare network Advocate Aurora Health, with the minimum value the contract will generate to Mach7 being $5.7 million over five years.

Advocate Aurora is among the top 10 largest not-for-profit integrated health systems in the US.

The deal will see Mach7 providing Advocate Aurora with its imaging platform which will enable Advocate Aurora to store and manage images across its network.

Additionally, Advocate Aurora has purchased the migration engine, which will allow it to move about 3.5 petabytes of data.

THC Global (ASX: THC)

Medicinal cannabis company THC Global has secured a second manufacturing licence – with this second licence covering the Southport facility in Melbourne.

According to THC Global, the permit now makes Southport the largest licenced bio-pharma extraction facility in the southern hemisphere.

THC Global chief executive officer Ken Charteris told Small Caps the licence makes the Southport plant the only Australian facility capable of producing GMP-compliant active pharmaceutical ingredient medicinal cannabis at scale.

The company will now complete validation activities at the plant throughout the remainder of the year with first production planned for early 2020.

ASX floats this week

Small Caps readers who want to view upcoming IPOs or see the performance of stocks that have listed in 2019 can now do so.

The latest company to make its way onto the ASX this week was:

QuickFee IPO ASX QFE

QuickFee (ASX: QFE)

QuickFee’s shares began trading on Thursday after the company’s offer raised $13.5 million via the issue of 67.5 million shares at $0.20 each.

Funds from the offer will go towards growing its payment platform for professional services in the US and Australia.

The company has developed the QuickFee platform that is marketed to and hosted by firms, which then recommend QuickFee’s loan services to their clients.

When a firm adopts the platform, its clients are given the option of paying invoices in full or by monthly instalments using a loan.

QuickFee’s revenue is generated in multiple ways including monthly hosting fees, credit card processing, rapid settlement of EFT transactions in the US, interest accrued and facility fees through debt financing of clients’ invoices.

The company reported (unaudited) on Friday a 170% growth in transaction activity in Australia for the financial year ending June 2019, with activity in the US increasing 182% during the same period.

The company’s shares closed out the week at $0.48 – up 140% on the $0.20 offer price.

The week ahead

In Australia, most of the attention will be on the June employment numbers to be released on Thursday.

Also coming under scrutiny will be Tuesday’s minutes of the Reserve Bank’s 2 July board meeting which cut interest rates for a second successive month.

At the moment the consensus is that the RBA will keep rates on hold until December to see if the spare capacity in the jobs market is soaked up by the dual interest rate cuts.

The combination of the jobs numbers and RBA minutes will be an important check on how realistic those forecasts are.

Overseas, Chinese economic growth and activity data will be watched carefully while in the US a swag of quarterly company reports will be an important check on how companies are travelling.

This week’s top stocks

John is a highly experienced business journalist and formerly chief business writer for the Herald Sun. He has covered Federal politics in Canberra, was Los Angeles Bureau chief for News Limited and was also chief of staff for the Herald Sun. He has covered a wide range of small and large cap ASX stocks and has a special interest in mining, technology and biotech.