A look back at July

As it is July 31 and the close of another month, a review of the last four weeks and the winter period are in order.

After two negative months in a row, the ASX will snap out of its slide today with its first positive month since April. As it currently stands, the market looks like locking in a 5.1% gain, which will make it the strongest month since January when the market jumped 4.9%. It will also mean it’s the firmest month of the year so far.

It may also be the first positive month this year not to make a 225 point gain. By sheer coincidence, every positive month this year registered a 225 point gain from the opening bell to the closing bell; so far the market is up 245 points and is in striking distance of 225 if we slide today.

It also puts our original call at the start of June that we were in for a winter wonderland back on track. The market is now up 2.45% since the start of June, and after yesterday’s RBA speech the likelihood of it going higher in the interim is stronger still.

There is a real possibility that an AUD/ASX inverse correlation could take hold. At the start of the year a fall in the AUD meant a drop in the ASX, as international investors shed the defensives that had made them double-digit total returns over the last 52 weeks; the banks, Telstra and supermarkets were the hardest hit by this relationship.

However, this trade is now exhausted and the banks, particularly CBA, have rebound strongly.

What has started to take over and has led to this inverse call are cyclical stocks that have their bottom-line in AUD, with international exposure picking up the slack.

The healthcare space started the move, with the likes of ResMed, which derives 95% of its earnings from overseas driving the space, along with Ansell and the plasma giant CSL.

In the last four weeks, the materials plays have come to the fore (and are the reasoning for the raise this month). BHP is up 11.4% from the open on July 1, RIO has moved higher by 10.1% over the same period, STO is also 10.1% firmer (had been 13%) and WPL is up 7% for the month.

But it’s the move from FMG that shows cyclical plays which are directly affected by the AUD are on a charge. FMG is up 23.6% since the start of the month; the company derives 98% of its earnings from China. Until April when the AUD/CNY pair was created, AUD/USD exchange rate was in play. A falling AUD will increase profits from FMG, and could see a slight surprise on the upside for it and other cyclical stocks over the next four weeks.

We understand most are pricing in an in-line earnings season, with slight negative bias as the likelihood of equity raisings from stocks that had a brutal confession season diluting share prices. However, with the fall of the AUD over the last few months and the fact that iron ore, oil and natural gas prices are well above forecast, we see the prospect of a positive bias in the low cost, high production stocks that are well managed and well financed. An extra boost from a low dollar may be the cherry on top. It is a stock pickers market heading into earnings season.  

Moving to the open, we are calling the ASX 200 up ten points to 5058 (+0.2%). With the big two macro data dumps in the US - non-farm payroll and GDP quarter-on-quarter due tomorrow and Friday, and the FOMC currently in a two-day meeting, trade will continue to be soft. However, there could be some window dressing as mangers look to close out the month inside their forecasts (although it is only the first month of the third quarter, so this might not be overly dramatic).

BHP looks set to slide off its recent highs with its deposit receipts, suggesting the stock should contract by 21 cents today to $34.74 (-0.61%), as iron ore drops a little further to be touching US$130 a tonne.

Tomorrow sees the start of one of the more interesting earning seasons in recent times. The RBA sees the mining boom slowing and the drop in capex as a real concern for the nation going forward. So, all eyes will be on the mining service sector this month to see if this prediction is coming true. 

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