MID MORNING MARKETS 25-05-18

The ASX 200 is down 18 points in mid-morning trade after Trump pulled out of North Korea summit. Banks and resources both hit. Huge rally in Telstra after UBS upgrade. WES up on sale of UK Bunnings. RC Round 3 continues #ausbiz

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TODAY

  • Ex-dividend – Opus Group (OPG) 1.0c
  • Sydney Airport (SYD) AGM
  • Japanese Tokyo CPI has come in lower than expected

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TONIGHT

  • UK – GDP Growth Rate 2nd Est, Finance Mortgage Approvals, Business Investment
  • US economic data – Durable Orders, Michigan Sentiment – Final
  • Fed Speak – Fed Chairman Jay Powell, Chicago Fed President (alt voter) Charles Evans, Atlanta Fed President (FOMC voter) Raphael Bostic; Dallas Fed President (non-voter) Robert Kaplan

COMPANY NEWS

  • Wesfarmers (WES) – Will divest the Homebase business in the UK and Ireland (bought in 2016) to a company associated with Hilco Capital. Hilco will acquire all Homebase assets (including the Homebase brand, its store network, freehold property, property leases and inventory) for a nominal amount. The 24 Bunnings pilot stores will convert to Homebase. Wesfarmers will participate in a “value share mechanism”, receiving 20% of any equity distributions from the business and allowing WES to participate in any profitable divestment of the business in the long-term. WES said there was potential for turnaround but risks and benefits didn’t justify the cost and management time. Expects to record a loss on disposal of £200-230m in the Group’s 2018 full-year financial results.
  • Resolute Gold (RSG) – Exceptional results confirm major gold discovery at Tabakoroni
  • Sandfire Resources (SFR) – Doolgunna Exploration update.
  • Spark (SPK) – Guidance update. Will be accelerating its Quantum performance improvement programme to realise financial benefits earlier than previously envisage. Additional implementation costs of $25-$30m to be brought forward. Continues to anticipate a total FY18 dividend of 25c.

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ANALYST RECOMMENDATIONS

  • REA Group (REA $90.85) – Citi has a Buy recommendation with a target price of $90.00. The analyst notes REA’s dominance, noting it continues to benefit from volume growth and mix changes.

CHT1

  • Domain Group (DHG $3.29) – Citi has a Sell recommendation with a target price of $2.80. The analyst thinks REA Group’s dominance limits DGH’s growth and that it will been to spend more on marketing, while it will be difficult to increase market share and margins. “Compare the Pair”  But with REA now looking overbought and DMG pretty cheap, the technical picture suggests it might be worth considering a pairs trade. Too risky for me….

CHT2

  • Oz Minerals (OZL $10.13) – UBS has a Neutral recommendation with a target price of $11.00 (from $9.80). UBS has changed analysts and raised its target price, but say shares are fully valued and rerating is not currently justified.

CHT3

  • Reliance Worldwide (RWC $4.56) – Buying John Guest Holdings for £687.5m ($1.22bn), reflecting a 12.4x multiple to FY17 Adjusted EBITDA (reducing to 10.3x including expected total synergies). John Guest is global leader in plastic PTC fittings with products distributed worldwide. Strong strategic fit. Expected to be more than 20% accretive to EPS and more than 30% including expected total synergies. Equity raising A$20m. Guidance: Expects EBITDA of $150-$155m in the 2018 fiscal year. Morgans has upgraded to an Add (from Hold) recommendation with a target price of $5.46 (from $4.33). The analyst thinks the move makes strategic sense, providing product, geographic and customer diversification and provides multiple long term growth options

CHT4

  • Telstra (TLS $2.79) – UBS has upgraded to a Buy (from Neutral) recommendation with a target price of $3.00 (from $2.80). While the analyst thinks the dividend is like to be cut from as early as FY20, they argue that the downside case is already known and there is upside from the NB/5G which isn’t really factored in. They say to watch for the June strategy day, which may be a catalyst, and flag an NBN bypass and aggressive market share move. Must admit I tend to agree, in that while I think there is plenty of downside, it’s hard to determine how much is already in the price. How many shareholders are still hanging on.

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OVERNIGHT

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SPI FUTURES -14

US EQUITIES – S&P500 -6 (-0.20%), Dow Jones -75 (-0.30%), Nasdaq -2 (-0.02%).

Main themes

  • US President Trump cancelled the June 12 meeting with North Korea’s Kim Jong-un, citing open hostility displayed in recent statements. After markets closed North Korea said it was open to discussions.
  • S&P500 was down as much as 26points, Dow down as much as 281.

EUROPEAN MARKETS – All lower. STOXX 600 -0.52%, UK FTSE -0.92%, German DAX -0.94%, French CAC -0.31%.

CURRENCIES

  • The US dollar eased 0.24% to 93.78.
  • The Aussie dollar is higher at US75.78c.

BONDS – Continued to strengthen with the 10 year yield down a further 2 points to 2.98%. 2-yr: -3 bps to 2.50%, 5-yr: -1 bp to 2.82%, 10-yr: -2 bps to 2.98%, 30-yr: -4 bps to 3.13%

COMMODITIES

  • WTI oil futures fell US$1.13 or 1.6% to US$70.71on expectations that OPEC and non-OPEC producers might raise output earlier than expected.
  • Gold futures rallied 1.1% after Trump cancelled the summit with North Korea.
  • Iron Ore – My IRESS feed is saying iron ore is still unchanged at US$68.00 but the CommSec site says China Import (Fines 62% Fe) was up US$1.75 or 2.8% to US$65.15/dry ton. (CFR Tianjin port)
  • LME metals – Prices were generally stronger. Cu +0.19%, Ni +1.71%, Al +0.48%

ECONOMIC DATA, NEWS & POLITICS

  • Auto investigation – Prior to the North Korea summit cancellation, the Commerce Department said that it started an investigation into whether automobile imports “threaten to impair the national security” of the United States.
  • Dodd-Frank rollback – Trump signed changes to bank regulations which eases rules on all but the biggest of banks, raising the threshold where banks are deemed too big to fail, meaning they don’t have to undergo stress tests or comply with other restrictions to limit financial risk.
  • US economic data – Weekly Initial Claims 234K (consensus 220K; prior 223K) and Continuing Claims 1.741 million (prior 1.712 million); March FHFA Housing Price Index 0.1% (consensus 0.6%; prior 0.6%); Existing Home Sales 5.46m (consensus 5.57m; prior 5.60m)
  • Fed rate hike expectations lower after Fed minutes – The implied probability of a fourth rate hike this year is down to 41.2% (from 46.3% on Wednesday).
  • European data – German Q1 GDP +0.3% (as expected, last 0.3%) to be +1.6%yoy (as expected, last 1.6%). June GfK Consumer Climate 10.7 (expected 10.8; last 10.8); French May Business Survey 109 (expected 108; last 109)
  • UK economic data – Retail Sales +1.6% (expected 0.8%; last -1.1%) to be +1.4%yoy (expected 0.1%; last 1.3%). April core Retail Sales +1.3% (expected 0.4%; last -0.5%) to be +1.5%yoy (expected 0.1%; last 1.3%)

QUOTE OF THE DAY

“Let me say that the credit belongs to the boys in the back rooms. It isn’t the man who sits in the limelight like me who should have the praise.” – Max Aitkin, Canadian-British publisher brn this day in 1879. Died 9 June 1964. Of course, behind every great man…

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