9 Jun 2017
Messy UK election result leads markets lower
Markets
• Equity markets finished mixed this week, impacted by political news in the US and the UK election.
• In local stock news, embattled telecommunications company Vocus Group received a preliminary and non-binding takeover offer from US private equity behemoth KKR for $3.50 per share. Bid is too low even for Vocus to open their books for inspection let alone takeover the company. Vocus board and management have only themselves to blame.
• Wesfarmers provided their 2017 strategy presentation with markets taking a dim view of what was disclosed. Items to note included Coles cutting prices even further, Bunnings UK continuing to lose money (longer than expected), and Target and Kmart progressing well on combining their head offices.
• Spanish bank Banco Popular was taken over by its larger Spanish competitor Santander after European regulators determined the bank was likely to fail. Santander exercised their right to write off all of Popular’s equity and force conversion of their hybrid securities (majority held by mum and dad investors) to equity for the price of $1.
• The Aussie dollar rose against the US dollar as a result of comments in the RBA’s rate decision statement and concerns regarding the US political situation.
Economics
• The Reserve Bank of Australia made no changes to the cash rate as expected. However, they maintained some of their more optimistic rhetoric regarding how the economy is travelling. Expect them to leave the cash rate as is for at least this year and next.
• Australian economic growth in the March quarter stagnated, printing a result only slightly above negative. This brings the annual rate down to the lowest it’s been since the GFC. There was quite a big dispersion across the stages, with Victoria growing at 4.5% and WA contracting by 6.6%.
• US employment numbers were lower than expected with a 138,000 increase in May together with a combined 66,000 downward revision to gains in the preceding 2 months. Hardly surprising that the rate of job gains is declining given unemployment is now at a 17 year low of 4.3%. In contrast, average hourly earnings increases remained modest.
• The US Fed remains on track to increase rates when they meet next week, with the market pricing a more than 90% chance of them doing so even in light of the slightly disappointing jobs numbers. However, the probability of rate hike beyond June has now dropped below 50%.
• The number of job openings in the US rose in April to a record high, but the pace of hiring slipped to a one year low. Corporates are wanting to hire, but holding back due to political and economic uncertainty.
Politics
• The UK elections took place today with final results yet to be confirmed. Current polling shows likely hung parliament, with a strong swing back to Labour (soft Brexit), with minority parties to hold the power. The result may bring PM Theresa May’s power into question given her failure to increase the Conservatives (hard Brexit) majority.
• A new set of problems arose in the Middle East with Saudi Arabia, UAE, Egypt, and Bahrain cutting diplomatic (and other) ties with Qatar, citing Qatar’s meddling in their internal affairs, supposed tolerance of terrorism, and their relationship with Iran.
• Ex-Director of the FBI James Comey sat through his first public testimony clearly maintaining that President Trump inferred he drop certain investigations which related to Russia’s potential meddling in the US elections. He also indicated he was stunned by Trump’s very disturbing and very concerning behaviour during several private meetings. Impeachment still on the cards.
