MID MORNING MARKETS 20-4-18

The ASX is down 14 points in mid morning trade. Materials take a step back. Banks holding up and AMP higher after CEO forced to step down onto his sword.  Inflation next week with US & UK GDP and ECB and BOJ meetings.  #ausbiz

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TODAY

  • Japanese Inflation

TONIGHT

  • European Consumer Confidence
  • US Earnings – Baker Hughes (BHGE), Ericsson (ERIC), General Electric (GE), Honeywell (HON), Manpower (MAN), Procter & Gamble (PG), Stanley Black & Decker (SWK), State Street (STT), Steven Madden (SHOO)
  • Fed Speak – Cleveland Fed President (FOMC voter) Loretta Mester, Chicago Fed President (alternate voter) Charles Evans, San Francisco Fed President (FOMC voter) and incoming NY Fed President John Williams

COMPANY NEWS

  • Bank Royal Commission – Westpac and ANZ are up today.
  • AMP – CEO Craig Meller will be stepping down immediately. It comes after a personal apology to advisers and a promist to offer support for the enquiries they are receiving. Mike Wilkins has been appointed interim CEO. Meller had been scheduled to retire. AMP has also apologised for the misconduct and failures in regulatory disclosures. its behaviour. AMP will be making a submission to the Royal Commission to respond to the issues raised – including the independence of the Clayton Utz. More than a billion wiped off the market cap of AMP…and not a great outcome for AMP shareholders over the last few years. No reason to buy now on the technical indicators
  • Sydney Airport (SYD) – March traffic numbers. 11.1% international passenger growth was a key highlight, although partly due to an earlier Easter. Capacity growth was 7.5% (more than 120,000 additional seats) and there was a 2.3 percentage point increase in average load factors above the prior corresponding period (pcp). Nationalities which had the greatest contribution to our international performance over the March holiday season were Indian (+28.2%), Chinese (+19.9%), South Korean (+15.2%) and the USA (+14.3%). Also during March, Skytrax named Sydney Airport as the top airport in the Australia/Pacific region by customers participating in one of the largest global customer satisfaction surveys. Other news – Emirates commenced its fourth daily Sydney – Dubai service (330k seats annually), Air India added another Dehli-Sydney service (to 5 per week – adding 14K seats annually), Virgin announced a new daily A330-200 service to Hong Kong (200K seats annually). Virgin and Air New Zealand announced significant additional seats trans-tasman (total 300K seats annually). Shares have been under pressure since mid last year but the MACD histogram (the blue bars) on the weekly chanrt are about to move into positive territory, which is a technical buy signal.

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  • APN Outdoor (APO) – AGM presentation
  • Fisher & Paykel (FPH) – New research published in the International Journal of COPD demonstrates significant benefits of nasal high flow therapy for COPD* patients using Fisher & Paykel Healthcare’s myAirvo device.
  • Nufarm (NUF) – Priced US$475m of senior unsecured notes. The notes will have a coupon of 5.75%. Funds will repay existing notes due to mature as well as other debts.

BROKER UPDATES

  • Asaleo Care (AHY $1.27) – Citi has a Sell recommendation with a target price of $1.25. AHY holds is AGM next Monday. The Citi analyst notes rising pulp costs and continued discounting by competitors in personal care pose further downside risks for FY18 earnings. They expect a further derating as competition leads to lower margins. Technically there is no reason to be here yet, but a turn of RSI and more convincing improvement in the MACD indicator could spark some interest.
  • Australian Pharmaceutical Industries (API $1.47) – 1H18 result is slightly ahead of revised guidance. Underlying NPAT down 8% to of $26.8m. Morgan has an Underweight recommendation with a target price of $1.43 (from $1.65). While the longer term strategy remains intact, the analyst thinks early positive signs have now given way to intensifying distribution and retail headwinds. Weaker consumer sentiment is having an impact, cash flow is disappointing, and the underwhelming guidance has led to a cut to the target price. Technically, shares look to be sitting on resistance and in a downward penant formation (not drawn), and the technical indicators are neutral,
  • BHP Billiton (BHP $30.92) – Quarterly production report. Full year production guidance remains unchanged for Petroleum, Metallurgical Coal and Energy Coal; Total Copper production guidance narrowed to 1,700-1,785 kt, however guidance for Olympic Dam reduced to approximately 135 kt following a slower than planned ramp-up after the major smelter maintenance campaign. Iron Ore production guidance reduced to 272-274 Mt (100% basis) reflecting car dumper reliability issues. Group copper equivalent production is expected to increase by 6% in the 2018 financial year. It’s a nice looking chart, and I wish I’d put my money where my mouth was (on Sky a few weeks back) and added some to our portfolios.
    • Citi has a Buy recommendation with a target price of $33.00. Production was slightly lower than expected and the key surprise was the lower FY18 iron ore guidance of 236-238mt because of car dumper reliability issues. More positively, petroleum guidance is towards the upper end of the 180-190mmboe range.
    • Morgan Stanley has an Overweight recommendation with a target price of $34.25. The analyst was disappointed with the report – only copper met their forecast. Progress at Olympic Dam is slow and a rail car dumper issue impacted on iron ore. Despite this, there is little impact on earnings forecasts. The key driver of valuation new term will be the US shale asset sale (first bids expected in June) which should boost capital management and BHP’s capacity to invest.
    • Morgans has an Add recommendation with a target price of $32.57 (from $32.92). The highlight for the analyst was copper, with another strong performance from Escondida. FY18 petroleum guidance unchanged but expected at the upper end of 180-190mmboe guidance because of the outperforming US offshore fields. They still see further upside to the share price from a combination of earnings growth and the high probability of additional capital management. Add rating retained.
  • Santos (STO $6.00) – Quarterly report yesterday. Reiterated that shareholders should take no action in relation to the Harbour Proposal. Updated guidance. The chart shows shares are becoming overbought…but Harbour Energy bid clouds the issue.
    • Citi has a Neutral recommendation with a target price of $6.50 (from $5.31). March quarter production was below estimates due to lower volumes from PNG LNG and disruptions at GLNG’s Fairview. STO has lowered the upper end of its production guidance for 2018, now 55-58mmboe, because of lower expected volumes from PNG LNG. Citi still thinks that free cash flow yield, while expected to soften in coming years, remains attractive and shareholders may want greater compensation from Harbour Energy.
    • Morgans has a Reduce recommendation with a target price of $4.55 (from $4.31). The analyst notes a larger impact on PNG LNG production from the earthquake and a fall in production from GLNG weighed on the first quarter performance. The main focus is Harbour Energy but given the national significance of the STO’s interests, they think the FIRB review process is likely to be a drawn out process,
  • South32 (S32 $3.80) – Citi has a Neutral recommendation with a target price of $3.80. It was mixed March quarter production result, and the analyst has upgraded medium-term forecasts for earnings per share by 12-15%. They note the strong balance sheet and the potential for further returns to shareholders but believe there is limited growth opportunities for the existing portfolio. The MCD histogram is giving a buy signal and the uptrend has resumed.
  • Iluka (ILU $11.68) – Strong uptrend in prices but shares looking a bit peaky here.
    • Citi has a Neutral recommendation with a target price of $11.40 (from $10.50). March quarter sales volumes was slightly better than the analyst expected and they have increased rutile and zircon price forecasts, driving earnings upgrades. 2018 and 2019 earnings forecasts are upgraded by 11% and 13% respectively.
    • Morgan Stanley has an Overweight recommendation with a target price of $12.45. A key takeaway was the decision to begin mining Ambrosia from 2019 rather than 2022, concurrently with Jacinth. This analyst says this could increase zircon production by 20% and provide for a more constant production profile. The other main takeaway was a 16% miss for Sierra rutile production due to operating issues and lower grades. Rio Tinto (RIO) is also experiencing problems at Richards Bay, so broker expects short term tightness in titanium oxide supply.
  • Challenger (CGF $10.78) – Q FUM yesterday. Total AUM up 3% qoq to $78.6bn; Life net book growth up 74% on pcp $629m; Life net book growth of 5.2% in third quarter; Total Life sales down 13% to $1.1bn; Long term annuities account for 43% of annuity sales; Funds Management net flows $2.1 billion. The chart may look terrible however the MACD histrogram is just starting to tick up and RSI is now heavily oversold. I tick-up in that would be a definite signal to buy.
    • Citi has a Neutral recommendation with a target price of $11.20 (from $13.75). Annuity sales were weak, raising questions about potential growth options despite the impact on near-term earnings not being significant. They have cut forecasts to be in line with the top end of the guidance range for FY18 normalised net profit of $565m. The analyst was particularly disappointed with Japanese sales which were down 21%, raises questions regarding the likely sales of this product if US interest rates continue to rise faster than Australian rates.
    • Morgans has a Hold recommendation with a target price of $11.75 (from $12.03). The analyst though annuity sales were soft (down 13%) but net book growth was solid because of a slowing of the annuity run-off rate. They like the story longer term and the strong organic growth profile, but still think shares are only fair value at current levels.

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NEXT WEEK – A short week for Aussie investors will see both US and UK GDP released, meetings by the Bank of Japan and ECB, and domestic inflation data.

  • Not a lot of data domestically, but there is – inflation and producer prices – will be very important in terms of expectations for RBA monetary policy. ANZAC Day holiday on Wednesday…and my mum’s birthday on Thursday.
  • Things are quiet in China too, with industrial profits on Friday the key release.
  • Lots happening in Japan – The manufacturing PMI is Monday but most of the key data is on Friday, with unemployment, retail sales, industrial production, and housing starts. Oh…and don’t forget a Bank of Japan meeting thrown in for good measure.
  • The ECB also meets this week on Thursday. Other data includes the Markit PMI numbers on Monday and consumer confidence on Friday.
  • UK GDP on Friday is the main release.
  • US GDP is also out next week. Consensus is for (annualised) growth of 2.9%. Keep in mind the US has a weird way or reporting GDP – they annualised the quarterly number. It’s the same as saying “if the economy grew at this quarterly rate for another 3 quarters (highly unlikely of course), this would be the annual rate”. Meaningless number but it’s what the give us…Japan is the same. Other data includes existing and new home sales, consumer confidence, durable good orders and the Uni of Michigan sentiment index.

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OVERNIGHT

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SPI FUTURES -6

US EQUITIES – S&P500 -16 (-0.57%), Dow Jones -83 (-0.34%), Nasdaq -57 (-0.78%).

Main themes –

  • Earnings results continue to lead the market
  • Apple (-2.88%) came under pressure after disappointing Q1 results and forecasts from supplier Taiwan Semiconductor Manufacturing
  • Bonds in focus as the US 10-year yield rose above 2.90%.

EUROPEAN MARKETS – Mostly stronger. STOXX 600 +0.02%, UK FTSE +0.16%, French CAC -0.19%, German DAX -0.19% the exception,

CURRENCIES

  • The US dollar was up 0.3% at 89.89.
  • The Aussie dollar is significantly weaker, currently trading at US77.31.

BONDS – 2-yr: UNCH at 2.42%, 5-yr: +3 bps to 2.76%, 10-yr: +4 bps to 2.91%, 30-yr: +6 bps to 3.11%

COMMODITIES

  • WTI oil futures closed down 18c or 0.3% at US$68.29 after earlier reaching new highs. Attention is moving to a deadline that US President Donald Trump faces in just over three weeks to extend sanctions relief for Iran. Trump has said he won’t waive the sanctions unless he can reach a deal with France, Germany and the UK to toughen its terms — an outcome that is far from certain.
  • Gold futures finished 0.4% lower, or US$4.70 to US$1,348.80.
  • Iron ore was up US$1.00 at US$65.50
  • LME metals saw a bit of a pull-back after recent rallies – Copper -0.54%, nickel -1.31%, aluminium -2.05%.

ECONOMIC DATA, NEWS & POLITICS

  • US Economic data – Weekly Initial Claims 232K (consensus 226K; prior 233K), Continuing Claims 1863K (prior 1878K), and April Philadelphia Fed 23.2 (consensus 21.0; prior 22.3); March Leading Indicators 0.3% (consensus 0.4%; prior 0.7%)
  • US earnings – Blackstone (+1.07%), BNY Mellon (+5.70%), Novartis AG (-3.30%), Philip Morris International (-15.58%)
  • Politics – Bloomberg News reported that Deputy Attorney General Rod Rosenstein told President Donald Trump last week he is not the target of an investigation by special counsel Robert Mueller.
  • European data yesterday – Eurozone February Current Account surplus €35.10bn (expected surplus €32.3bn; last surplus €39.00bn)
  • UK March Retail Sales -1.2% (expected -0.5%; last 0.8%) to be +1.1%yoy (consensus 2.0%; last 1.5%). March core Retail Sales -0.5% (expected -0.4%; last 0.4%) to be +1.1% year-over-year (consensus 1.4%; last 1.2%)
  • Australian employment data yesterday – was clearly disappointing.

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QUOTE OF THE DAY

“Money looks better in the bank than on your feet.” – Sophia Amoruso, American businesswoman born this day in 1984. Might be questionable after the recent Royal Commission testimony, but we get your point Sophia.

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