MID MORNING MARKETS 05-06-18

The ASX200 is down 42 points in mid-morning trade, despite good leads in global markets. Interest rate sensitive sectors the big drag along with Energy and Materials. CBA outperforms. KGN founders offload $100m. RBA meeting later today #ausbiz

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TODAY

  • Economic data – AIG Services Index, Current Account
  • Ex-dividend – Vietnam Industrial Investments (VII) 1.5c
  • RBA Interest Rate Decision. Nothing exciting expected. The implied cash rate is 1.65% in one years time, suggesting only a 60% chance of a rate rise and a full 25 basis point increase is not factored into markets until October next year.

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  • Chinese data – Caixin Composite PMI, Caixin Services PMI
  • Japanese data – Household Spending, Nikkei Services PMI

TONIGHT

  • European data – Markit Composite PMI Final, Markit Services PMI Final, Retail Sales,
  • ECB President Draghi Speech
  • UK – Markit/CIPS UK Services PMI
  • US data – ISM Services, JOLTS – Job Openings

AHEAD – GDP TOMORROW

Looking ahead to GDP on Wednesday – Yesterday, as part of the company profits data, inventories rose 0.7% in the quarter. This should add 0.2% to the GDP reading – whereas economists had been expecting no contribution – so some upgrades could be expected.

The highest quarterly GDP forecast in the market is SocGen’s 1.2%; of the big four banks, ANZ and Westpac are tipping 0.9%, NAB 0.8%, and CBA somewhere in between.

Today we get other partial components to the GDP data, including government spending and ad net exports.


COMPANY NEWS

  • Kogan (KGN) –  Media reports Kogan.com founder and chief executive Ruslan Kogan and chief financial officer David Shafer are together selling around 10% of the company.
  • GUD Holdings (GUD) – Has bought Disc Brakes Australia Pty Ltd (DBA) for $20m. DBA operates in the automotive aftermarket through supplying a range of disc brake rotors, brake drums and disc brake pads. DBA has an annual sales turnover of around $20m and generates an annual EBIT of around $3m.
  • Charter Hall Retails REIT (CQR) – Has established a JV with the Charter Hall Prime Retail Fund (CPRF), to acquire Gateway Plaza in Leopold, Victoria for $117m.
  • Oz Minerals (OZL) – JV partner Cassini Resources has provided an exploration update for the west Musgrave project. Significant regional exploration drilling program has commenced; Targeting new EM conductors generated from recent surface and down-hole geophysical surveys; All conductors adjacent to, or extensions of known Ni and/or Cu sulphide mineralisation; Initial drilling commenced at Yappsu, with One Tree Hill to follow; One Tree Hill drill program targeting a 700m long conductor; Work program funded by OZL Earn-in/JV
  • Fonterra (FCG) – May Global Dairy Update. Lowered guidance for normalised earnings and dividend for the year; Exports for all regions grew strongly/ Increases milk price forecasts for 2017/18 season to NZ$6.75/kgMS; Global supply and demand continues to be positive for farmers
  • Retail Food Group (RFG) – FY18 earnings update. FY18 underlying NPAT $34.5m and statutory NPAT loss of $87.6m. Does not include approximately $3.0m of anticipated international licence fee revenues that may occur before the year end, but are uncertain. Trading performance continues to be affected by persistent difficult retail market conditions, outlet closures, and negative sentiment regarding both retail franchising and RFG in particular. Also a comment about maintaining contact with “stakeholders”.

ANALYST CHANGES

  • CBA ($69.69) – AUSTRACK resolution. Civil penalty of $700 million together and AUSTRAC’s legal costs of $2.5m, CBA has admitted further contraventions of Australia’s Anti-Money Laundering and Counter-Terrorism (AML/CTF) Act, beyond those already admitted, including contraventions in risk procedures, reporting, monitoring and customer due-diligence. AUSTRAC’s civil proceedings are otherwise dismissed. CBA provided for an estimated penalty of $375m in the last half and the $700m will be recognised in the FY18.
    • Deutsche Bank has a Hold recommendation with a target price of $77.00. The analyst notes the penalty is bigger than the provision but manageable and uncertainty has been removed.
    • Morgan Stanley has an Underweight recommendation with a target price of $70.00. The analyst sees the outcome as positive. They note the sale of CFS GAM (asset management) could improve the capital position but leave and earnings gap.
    • Morgans has an Add recommendation with a target price of $79.00. The analyst thinks it’s a god outcome , with only 2 concerns outstanding – rating downgrade risk and offshore charges for the AML/CTF breach.
    • UBS has a Neutral recommendation with a target price of $74.00. The analyst notes the outcome is worst than provided for but better than market fears. More provisions have been made but the analyst is concerned total costs usually exceed original estimates.
    • Credit Suisse has a Neutral recommendation with a target price of $72.50. The analyst has upgraded estimates by 1% and says while it’s one les uncertainty, there is more work to be done. They factor in an additional $$500m for conduct and litigation expense.
    • Deutsche Bank has a Neutral recommendation with a target price of $75.50. The analyst sees less scope for a special dividend and thinks the value premium is hard to justify.
    • Ord Minnett has a Hold recommendation with a target price of $76.00. The outcome was worse than the analyst expected and they have reduced 2H earnings forecasts by 2%. They note potential international repercussions.

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  • CSL – UBS has a Buy recommendation with a target price of $196. The analyst points to US data showing IG growth 10.4% in February. With the US consuming 55% of IG globally, they think the data suggests large unmet clinical need. They expect growth to slow to 7-8% but think CSL is well-placed.

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  • DuluxGroup (DLX $7.51) – Citi has upgraded to a Neutral (from Seel) recommendation with a target price of $7.60 (from $7.500. The upgrade follows a site visit to the new Merrifield paint plant and recent share price weakness.  The analyst tihnkks the new plant offers upside revnue potential while the exit of WES in the UK raises upside risk for DLX’s roll-out of Craig & Rose and Selley’s brands in the UK.

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  • Kogan (KGN $9.80) – KGN is entering Whitegoods and Built-In Kitchen Appliance Market with its own range of Exclusive Brand price-competitive products. No detail provided at this stage. Expecting more info before the end of the year. UBS has a Buy recommendation with a target price of $10.60. The analyst notes the whitegoods increases the company’s addressable market, but will not provide an immediate earnings lift (time to build inventory). They see more additions ahead, noting credit cards is an obvious choice.

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  • Healthscope (HSO $2.33) – Credit Suisse has a Neutral recommendation with a target price of $2.36. The analyst has downgraded earnings due to structural issues in the industry including affordability pressures. They also note the continued possibility of M&A

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OVERNIGHT

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SPI FUTURES -23

US EQUITIES – S&P500 +12 (+0.45%), Dow Jones +178 (+0.72%), Nasdaq +52 (+0.69%).

Main themes

  • Apple shares are at an all-time high, while retailers also outperformed. Wal-Mart +2.93%, Macy’s +4.33% and Target +4.88%.

EUROPEAN MARKETS – Mostly higher.  STOXX 600 +0.31%, German DAX +0.37%, French CAC +0.14% Italian MIB -0.45% the exception

CURRENCIES

  • The US dollar was down 0.2% at 94.04.
  • The Aussie dollar is significantly stronger at US76.55 after strong economic data yesterday.

BONDS – Continued to ease, with the 10-year moving back towards 3%. 2-yr: +3 bps to 2.51%, 5-yr: +5 bps to 2.79%, 10-yr: +4 bps to 2.94%, 30-yr: +4 bps to 3.08%. Italian debt extends rebound, with the 10-year yield down 14bp to 2.50%.

COMMODITIES

  • WTI oil futures fell a further $1.06 or 1.6% to US$64.75, the lowest since 10 April, after falling 2.65% last week and 5% the previous week. Memorial Day appears to have been a seasonal peak for prices. Key factors include the June 22 OPEC meeting, where there are wide expectations of an agreement to raise production, as well as continuing trade concerns.
  • Gold futures fell 0.1% at US$1297.80.
  • Iron Ore – IRESS reports iron ore unchanged at US$65.50 a tonne. The CommSec site says China Import (Fines 62% Fe) was down US85c to US$63.85/dry ton. (CFR Tianjin port)
  • LME metals – Mostly higher. Cu +1.15%, Ni +0.26%, Al +0.39%, Sn -0.84% the exception

ECONOMIC DATA, NEWS & POLITICS

  • US/UK – US President Trump spoke with UK PM Theresa May, discussing the upcoming summit with North Korea. The press release said President Trump also called for a “new and comprehensive deal that addresses all aspects of Iran’s destabilising behaviour” and the need to rebalance trade with Europe. Both leaders look forward to the US visit to the UK in July. May reportedly told Trump that US tariffs on steel and aluminium were “unjustified”.
  • US economic data – Factory Orders -0.8% (consensus -0.5%; prior 1.7%)
  • taly – Reports of a flat tax for companies, and even for families, starting in 2019. Interior minister Matteo Salvini has also reiterated his pledge to increase the pace of deportations of illegal migrants
  • European data – PPI 0.0% (expected 0.3%; last 0.1%) to be +2.0%yoy (expected 2.4%; last 2.1%). June Sentix Investor Confidence 9.3 (expected 18.4; last 19.2)
  • UK – Construction PMI 52.5 (expected 52.0; last 52.5)
  • Strong domestic economic data yesterday saw the Aussie dollar rally.

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QUOTE OF THE DAY

“Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.” – John Maynard Keynes, English economist born this day in 1883. Died 21 April 1946.

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