BHP's overall production increase, Santos falls and what is the All Ordinaries Index next move?

Soaring iron ore prices and a lower Australian dollar have failed to excite the market as miners including BHP, RIO and South32 came in as expected with their quarterly updates this week. While miners led the corporate reporting season, which is currently underway in Australia, what can we expect across the broader market?

Despite mixed feelings, I believe that the outlook for the Australian stock market is still bullish over the medium to long term. That said, the market is expected to pull back in the short term.

Miners Quarterly Reports as Expected
BHP, RIO and South32 updated the market this week, with BHP reporting an overall production increase of 11 per cent for the June quarter, with iron ore production up 12 per cent. RIO, on the other hand, reported that iron ore production was down 7 per cent for the quarter based on the previous year. Both RIO and S32 where down this week, while BHP remained flat.

Recent operational challenges, decreases in production guidance and concerns about future production cost increases have dulled the Materials sectors performance over the past month. Given this, I do not expect anything exciting next week as FMG and NCM are due to deliver their reports.

Santos falls despite positive trading update
Santos has had a stellar year reporting record production volumes, sales and revenue along with $600 million in free cash flow. After rejecting a $14.4 billion takeover bid earlier this year, the sky seems to be the limit with the stock up over 30 per cent this year.

Despite this, Santos Energy surprised the market by falling after releasing its positive trading update, which is likely due to profit takers locking in gains. What better time to sell than on good news, which is why it is not uncommon to see stocks fall heavily when they report all time profits. Remember, the big players are buying these stocks at lower prices before the reports come out and are doing so for the long haul; therefore, it’s no surprise that they will cash in when the sun is shining.

Woodside, on the other hand, fell heavily this week after reporting both its quarterly production and revenues were down. Given that the stock has good support around $33, this fall may be short lived although if it breaks below this level, it will fall to $30 or below.

Job data is key to the All Ordinaries Index next move
Over the past couple of weeks, the All Ordinaries Index has moved down slightly, as the waiting game by investors continues. Some are waiting for the market to trade through its all-time high before entering the market, while others are waiting for some good news, which may come from jobs data and, ultimately, the RBA’s outlook on the cash rate.

Unemployment remained steady during the June quarter at 5.2 per cent, and while we are at historically low levels, it’s important to consider that the population has increased. In 2010, unemployment was at similar levels, at around 5.3 per cent with a population of 22.12 million people.

Today the population is around 25.08 million people, which means there is 130,000 more people unemployed compared to 2010. Not to mention, more people are opting for casual part-time work, which has resulted in lower wages growth in recent years.

So while the unemployment rate may appear to be relatively good, we have not really improved over the past ten years, as there are now more people out of work or looking for jobs. Based on this, it is understandable why the economy is relatively flat and interest rates are low.

While the government’s tax refunds of $1,000 will start to hit bank accounts soon, it will be interesting to see if this actually stimulates the economy as expected. In my opinion, what’s more important is how the government plans to create more jobs to stimulate the economy.

This week’s top and bottom performers
Looking at the sectors, Consumer Staples was the big winner up around 5 per cent followed by Healthcare up around 4 per cent. Energy was the loser this week, down over 3 per cent, while the Financials and Communication Services sectors were down over 1 per cent.

The top performing stocks in the ASX 100 include Northern Star Resources up around 10 per cent followed by Evolution Mining up over 6 per cent and Bluescope up nearly 4 per cent. The bottom performers include CIMIC Group, which was punished after poor results, down around 18 per cent. AMP was not much better, as its shares fell another 20 per cent to a record low of $1.76 after the company reported it was unlikely to sell its life insurance arm and that it would not be paying a dividend for the first half of 2019.

AMP’s result was to be expected given its involvement in the fees for no service scandal, which was highlighted in the Royal Commission earlier this year. This stock is yet another example of why you should never try to bottom pick, as many retail investors bought AMP believing it was already cheap, only for it to fall away with not much hope of a rise any time soon.

So what do we expect in the market?
The move down on the All Ordinaries Index this week is nothing to be concerned about, as it is a normal part of market behaviour. Remember, I previously stated that I was expecting more volatility in the market around mid-July to early August, with a move down over one or two weeks, so this is nothing out of the ordinary

Over the next month I am confident that the market will turn to rise and move up through its all-time high, as it moves into the next stage of its yearly cycle. That said, the move up may be short and sharp, as I am still expecting the yearly low to occur in September or possibly October.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in book stores and online at www.wealthwithin.com.au