MID MORNING MARKETS 12-04-18

The ASX 200 is up 1 point in mid morning trade after a strong rebound from -26. Global market focus on Trump/Russia threats, missiles in Saudi Arabia and FOMC mintes. Materials rallying, banks lagging.  #ausbiz

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  • Economic data – Home Loans
  • Ex-dividend – Future Generation Investment Company (FGX) 2.2c, Pengana International Equities (PIA) 3.5c, WAM Active (WAA) 2.9c, WAM Capital (WAM) 7.8c, WAM Research (WAX) 4.8c, WAM Leaders (WLE) 2.5c, WAM Microcap (WMI) 2.0c
  • Chinese data – FDI (YTD)
  • BoJ Kuroda Speech

TONIGHT

  • European data – Industrial Production
  • Speeches by central bank officials – ECB Cœuré, BoE Broadbent, BoE Mark Carney
  • US economic data – Import Prices/Export prices
  • Earnings season– 1Q profits overall are forecast to have risen 17% from a year earlier. S&P 500 earnings per share to get a 6.9% boost from lower corporate taxes (Donald Trump cut the corporate tax rate to 21% from 35%.) Even without tax benefits, EPS growth should exceed 15%. US Banks in particular should be supported by higher margins, stronger loan growth, better trading revenues, and benign credit quality trends.
    • Thursday – BlackRock
    • Friday – Citigroup, JP Morgan, Wells Fargo

COMPANY NEWS

  • Afterpay Touch (APT) – Citibank reportedly the company looking at a $200m investment in APT. Yesterday APT said it is working with “a large international bank” to establish the $200 million warehouse facility to supplement its existing $350 million agreement with National Australia Bank. If you saw me on Sky Business, you will know that I am not a fan. Shares are lower today.
  • BT Investment Management (BTT) – Funds under Management (FUM) for the quarter ended 31 March 2018, up $0.9 billion to $99.0 billion

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  • oOh!media (OML) – Confirms a confidential, non-binding indicative offer to HT&E Limited (HT1) in relation to Adshel. HT&E Limited declined to engage in relation to the Indicative Offer.
  • Tassal Group (TGR) Presentation to the Credit Suisse Food and Beverage Day.
  • Oil Search (OSH) – Arecertification of gas resources in the P’nyang field in PRL 3 (Oil Search – 38.51%) has been completed by independent expert, Netherland, Sewell & Associates, Inc. (NSAI). It has resulted in a material increase in both 1C and 2C certified gas resources. The certified 1C gross contingent gas resource has more than tripled, to 3.51 trillion cubic feet (tcf), while certified 2C contingent gas resources has increased to 4.36 tcf.
  • Brambles (BXB) – Has divested its 50% interest in the Hoover Ferguson Group Joint Venture (HFG) to its co-venturer, First Reserve for $150m. The divestment will be used to repay debt and cause a non-cash writedown of US$4.9m to be included in FY18 results.
  • GWA Group (GWA) – Investor Market Briefing
  • Rio Tinto (RIO) – AGM

BROKER NEWS

  • AGL Energy (AGL $20.96) – Citi has upgraded to a Neutral (from Sell) recommendation with a target price of $21.28 (from $20.54). The analyst has looked at the data available on the entry of Alinta to the east coast and the price response observed in incumbent tariffs. While they still believe consensus earnings estimates signal complacency, relative to the risk posed by retail competition, the share prices imply compensation is already adequate in terms of retail margin compression.

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  • Afterpay Touch (APT $5.60) – Morgans has a Hold recommendation with a target price of $6.12 (from $6.34). The analyst saw the best things about the update as the growth in customer numbers and the stable net loss ratio. The main weakness was the 4% sequential decline in quarterly merchant sales. An update on the US business expansion will be provided in May. They have reduced FY18 and FY19 EPS estimates by -6-7% on the reduced merchant sales forecasts.

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  • HT&E (HT1 $1.88) HT! has received an indicative bid from oOh!media (OML) for its AdShel business. Details were not disclosed and the company has rejected the offer
    • Credit Suisse has an Outperform recommendation with a target price of $2.30 (form $2.20). The analyst believes the company is worth more in a break-up scenario than as currently constituted, which is reflected in the current implied valuation of its assets relative to listed peers. BT1expects EBITDA to be up 4-5% in the first half, and CS has raised FY18 estimates by 2%.
    • Macquarie is advising in the matter and hence is restricted from making a recommendation on both HT1 and OML. HT&E is confident it can meet or beat current consensus earnings forecasts for FY18. The bid confirms Macquarie’s prior suggestion that Adshel is an attractive target for outdoor advertisers. The proposed merger of oOh!media and APN Outdoor (APO), blocked by the ACCC, identified significant synergies.
    • UBS has a Neutral recommendation with a target price of $1.80. Thea analyst believes such a merger, were it to proceed, potentially poses fewer competition issues than the one between OML and APN Outdoor (APO) which was called off. The company update also indicated Adshel revenues were tracking in line with the February trading update and first half revenues are expected to meet, or exceed, 2018 consensus estimates of $113-114m in EBITDA.

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  • South32 (S32 $3.40) – The Columbian Constitutional Court has overturned the previous decision of a lower court, deciding South32’s Cerra Matoso nickel mine is indeed the source of local health issues. Macquarie has an Outperform recommendation with a target price of $3.70. The analyst notes that the mine contributes around 5% of South32 earnings and its future is now unclear. This risk is more than offset by upside risk to their commodity price forecasts, with shares trading on a 15% free cash flow yield at current spot prices.
  • Origin Energy (ORG $8.86) Citi has upgraded to a Buy (from Neutral) recommendation with a target price of $10.06 (from $9.61). The analyst has looked at data available on the entry of Alinta to the east coast and the price response observed in incumbent tariffs. While they still believes consensus earnings estimates signal complacency, relative to the risk posed by retail competition, the share prices imply compensation is already adequate in terms of retail margin compression.
  • Insurance Australia Group (IAG $7.58) – Held an investor day yesterday and confirmed confidence in its cost targets and improvements in capital efficiency.
    • Citi has a Neutral recommendation with a target price of $7.75 (from $7.50). The analyst notes IAG’s confidence that it will reduce its cost base by 2020 and they incorporate at least $250m in cost savings in its calculations. They factor in 2.5% in reserve releases in FY19 and FY20. Earnings estimates are lifted by 6% for FY19 and 11% for FY20.
    • Credit Suisse has a Neutral recommendation with a target price of $7.50. Despite IAG’s confidence, the CS analyst is cautious about the external operating environment and is concerned that the favourable premium rate environment could unwind by FY20. They believe there is potential for another leg up in the share price on delivery of cost reductions and capital management but confidence in the pricing environment is not expected until late 2018 or early 2019.
    • Macquarie has a Neutral recommendation with a target price of $6.45 (from $6.40). The analyst believes a focus on business simplification, cost reduction and increased capital efficiency is positive, but such programs need to be accelerated in the face of increasing competition, and a potential longer-dated threat posed by autonomous vehicles.
    • UBS has a Neutral recommendation with a target price of $7.30. The analyst believes that while potentially disruptive challenges were acknowledged, the strength of the brand and margin tailwinds allow the business to conduct the necessary fixes to legacy systems and prepare for change. IAG has confirmed that premium rate rises are solid and support positive margin momentum across the group

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OVERNIGHT

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SPI FUTURES -10

US EQUITIES – S&P500 -15 (-0.55%), Dow Jones -219 (-0.90%), Nasdaq -25 (-0.36%).

Main themes –

  • President Trump warned Russia about impending military action against Syria, leading to risk-off flows
  • Energy shares rally as oil prices climb to three-year high following unconfirmed reports that Saudi Arabia intercepted a rocket over Riyadh
  • Minutes from March FOMC meeting reveal that a number of officials expect a slightly steeper-than-expected path of rate increases; see trade tensions as a downside risk

EUROPEAN MARKETS – All lower. STOXX 600 -0.59%, UK FTSE -0.13%, German DAX -0.83%, French CAC -0.56%.

CURRENCIES

  • The US dollar was weaker, down 0.16% to 89.51.
  • The Aussie dollar is little changed at US77.63c.

BONDS – 2-yr: +1 bp to 2.32%, 5-yr: -1 bp to 2.62%, 10-yr: -1 bp to 2.79%, 30-yr: -1 bp to 3.01%

COMMODITIES

  • WTI oil rallied a further 2.0% or US$1.31 to US$66.70 to their highest since December 2014 on the increased geopolitical tension. Crude inventories rose by 3.3mb compared to expectations of a decline of 189,000 barrels.
  • Gold futures were 0.59% higher at US$1,363.00. While higher on geopolitical risks, prices came off their highs after the FOMC meeting minutes
  • Iron ore was up US$1.00 at US$65.50
  • LME metals continued to rally following sanctions against Russian companies controlled by Putin’s inner circle – Copper +0.07%, nickel +1.24%, aluminium +2.23%

ECONOMIC DATA, NEWS & POLITICS

  • US economic data – Weekly MBA Mortgage Index -1.9% (prior -3.3%), March CPI -0.1% (consensus 0.1%; prior 0.2%) and core CPI 0.2% (consensus 0.2%; prior 0.2%). The CPI reading was weighed down by a 2.85 fall in energy. The key takeaway from the report is that it showed a firming (though not scary) inflation trend that will keep the Federal Reserve to its tightening bias and belief that at least two more rate hikes are warranted this year.
  • Oil – Saudi Arabia’s air defence forces intercepted at least three ballistic missiles fired at Saudi cities by Yemen’s Houthis, who claimed to have targeted the defence ministry in Riyadh and a Saudi Aramco distribution facility in Najran on Wednesday. It followed reports that the Houthi rebels in Yemen had launched a drone strike on a facility owned by Saudi Aramco, the kingdom’s national oil giant.
  • Italian politics – Reports from Italy indicate President Sergio Mattarella is expected to ask Lega’s Matteo Salvini to form a government. This means Mr. Salvini will receive preference over Movimento Cinque Stelle’s Luigi Di Maio
  • UK economic data – UK Construction Output -1.6% (expected 0.7%; last -3.1%) to be -3.0%yoy (expected -2.5%; last -2.1%). February Industrial Production +0.1% (expected 0.4%; last 1.3%) to be +2.2%yoy (expected 2.9%; last 1.2%). February Manufacturing Production -0.2% (expected 0.2%; last 0.1%) to be +2.5%yoy (consensus 3.3%; last 2.2%)
  • The Russian Ruble bounced after surrendering nearly 9.0% over the past two days. USD/RUB -0.92% to 62.45

QUOTE OF THE DAY

“Every day is a blessing – not to get too schmaltzy, but, really, it is.” – David Cassidy, American actor and singer born this day in 1950. Died 21 November 2017

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