Morning Market Update - 11 October 2018

Pre-Open Data

International Market vs Australian Market

Key Data for the Week

Key economic data released this week:

  • Wednesday – UK – Trade Balance deficit widened to -£1.27bn, as manufacturing production and construction output fell 0.2% and 0.7% respectively.
  • Wednesday – AUS – Westpac Consumer Confidence rose marginally, from 100.5 in September to 101.5 in October.
  • Thursday – US – Consumer Price Index
  • Thursday – AUS – Housing Finance

S&P ASX 200 Last 12 Months

Australian Market 

The ASX 200 gained 0.14% yesterday, led by gains in the Consumer Discretionary sector (+2.1%). Leading names; Corporate Travel Limited (CTD), Dominos Pizza and Harvey Norman all rose in the range of 3-5%. CTD noted it is off to a strong start for FY19 and its Lotus acquisition, which completed on 2 October 2018, is well progressed.

In company news, Education provider Navitas (NVT), surged after receiving an unsolicited takeover bid from a consortium, including private equity interests and former CEO Rod Jones. The group made an offer of $5.50 per share in cash, or, $2.35 in cash, plus 1 share in the resulting entity for every two NVT shares held. The offer represents a premium of 26% of the share price the previous day. NVT settled at $5.30 for a gain of $0.95 or 22%, having closed at $4.35 a day earlier. 

The Australian futures market points to a 1.84% fall today, being driven by weaker overseas markets.

Overseas Market 

European sharemarkets fell on Wednesday in a global sell-off on fears of rising bond yields. Fears of slower Chinese demand led to a fall in luxury stocks, with Louis Vuitton Moet Hennessy down 7.1%, after reporting softer sales. The Technology sector was amongst the worst performer, down 4.3%. The broad based STOXX Europe 600 fell 1.6% to the lowest levels in 6 months, the German DAX lost 2.2% and the UK FTSE 100 slid 1.3%. 

US sharemarkets fell overnight, as investors feared higher long term bond yields could slow economic activity and profits. Technology stocks led the declines along with luxury retailers, with ongoing concerns of the US-China trade war. The S&P 500 fell 3.3%, the NASDAQ dropped 4.1% and the Dow Jones lost 3.2%.

CNIS Perspective 

The yield on the US 10 year government bond has made a break above 3%, and is now back at levels last seen in 2011. 

With the S&P 500 equity market being relatively flat over the past few weeks, apart from last night, the rising bond yield has seen the Equity Risk Premium (ERP) shrink. 

The ERP represents the expected return from equities above the risk free government bond yield, so rising bond yields, and subsequent narrower ERP, means there is less justification for taking on the risk of owning equities. 

Historically, an ERP under 3% is a time to be a cautious, but with interest rates now lower for longer, maybe a benchmark rate below 3% can be tolerated.

In any case, the ERP is an insightful and interesting measure of the equity market’s value relative to the risk free bond market.

Yesterday the ERP sat at 2.83%. After last night, it’s now back up to 3.05%.

S&P 500 ERP vs S&P 500 Index

Should you wish to discuss this or any other investment related matter, please contact your Investment Services Team on (02) 4928 8500.


The material contained in this publication is in the nature of general comment only, and neither purports, nor is intended to be advice on any particular matter.  Persons should not act or rely upon any information contained in or implied by this publication without seeking appropriate professional advice which relates specifically to his/her particular circumstances.  Cutcher & Neale Investment Services Pty Limited expressly disclaim all and any liability to any person, whether a client of Cutcher & Neale Investment Services Pty Limited or not, who acts or fails to act as a consequence of reliance upon the whole or any part of this publication. Cutcher & Neale Investment Services Pty Limited ABN 38 107 536 783 is a Corporate Authorised Representative of Cutcher & Neale Financial Services Pty Ltd ABN 22 160 682 879 AFSL 433814


Topics: CNIS, Dow Jones, Australian Market, ASX, international markets

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