MID MORNING MARKETS 8-6-18

The ASX200 is down 7 points in very boring mid-morning trade. Long weekend and big week ahead suggest caution. Energy on top, Gold on the bottom, everything else mixed. S&P/ASX index changes, SHORT CHANGED report and looking to next week #ausbiz

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  • Ex-dividend – Contango Income Generator (CIE) 1.6c, Evolve Education Group (EVO) 1.8c
  • Chinese trade data
  • Japanese data – Current Account, GDP Growth Rate, Bank Lending, Eco Watchers Survey Current/Outlook

TONIGHT

  • US economic data – Wholesale Inventories
  • Chinese inflation data is out over the weekend

S&P JUNE QUARTER REBALANCE

  • S&P/ASX 20
    • Addition – Amcor Limited (AMC)
    • Removal – AMP Limited (AMP)
  • S&P/ASX 50
    • Addition – Cochlear Limited (COH)
    • Removal – Incitec Pivot Limited (IPL)
  • A&P/ASX100
    • Addition – Whitehaven Coal Limited (WHC)
    • Removal – GrainCorp Limited(GNC)
  • S&P/ASX200
    • Additions – Afterpay Touch (APT), Appen Limited (APX), Inghams Group Limited (ING)
    • Removals – Asaleo Care Limited (AHY), Iron Mountain Incorporated (INM), Retail Food Group Limited (RFG)
  • S&P/ASX200 All Australian
    • Addition – Bingo Industries Limited (BIN), Clean Teq Holdings Limited (CLQ), Kidman Resources Limited (KDR)
    • Removal – Australian Agricultural Company Limited (AAC), Myer Holdings Limited (MYR), Retail Food Group Limited (RFG)

COMPANY NEWS

  • Rio Tinto (RIO) – JV with Minmetals to explore for world-class mineral deposits in China.
  • Westpac (WBC) – New management changes. Chief Risk Officer, Alexandra Holcomb is retiring, to replaced by David Stephen, currently Group Chief Risk Officer, RBS, who will join the Group in the coming months. Current WBC CFO, Peter King will act as Chief Risk Officer until Mr Stephen commences and WBC Deputy CFO, David Lees, will act as CFO during this time.
  • Wisetech Global (WTC) – Has acquired Fenix Data Systems, a Canadian customs management solutions provider for ~$2.5m upfront, with a further multi-year earn-out potential of up to ~$0.8m related to business and product integration, and revenue performance. Fenix offers a range of Canadian customs compliance solutions to customers including DHL Express, Farrow, ITN Logistics, Swissport Cargo Services, and many other logistics providers and organisations. Strategic value but not material.
  • Perpetual (PPT) – Leadership Update. Chris Green be interim Chief Executive Officer from 9 June to 24 September 2018 when Rob Adams starts as the new Managing Director and Chief Executive Officer. Mr Green is currently Group Executive, Perpetual Corporate Trust and has been with the company since 2006.
  • Bubs (BUB) – Entered aareement with a CNCA licenced production facility. Bubs to immediately commence application process for CFDA registration. Provides a defined pathway to maximising Bubs’ access to 80,000 Mother and Baby stores through its partnership with QianJiaWanPu, China’s largest nationwide distributor of infant formula. Manufacturing facility has 10 million tin production capacity – Bubs commitment for minimum 500K tins within 12 months following registration. Increases Bubs’ overall operating flexibility, agility and product expansion opportunities for both domestic and Chinese labelled products.

ANALYST CHANGES

  • ANZ – Morgans has an Add recommendation with a target price of $29 (from $30). The analyst thinks the cartel case could involve charges as high as $2.6bn, but historical cases guide to a 50% penalty, more like $1.3bn. They haven’t included any penalties in their forecasts, but is factoring in the risk of it, and a class action, in their view.
  • Wesfarmers (WES) – Analyst meeting. Expects demerger of Coles during FY19. Dividend policy will remain unchanged after the demerger
    • Citi has a Sell recommendation with a target price of $41.10 (from $41.40). The analyst thinks capital returns are more likely than M&A. Floor space of Target reduced by 20% over the next 5 years and Coles ramping up private label and refurbishment. They note the continued high premium and see the risk of a de-rating.
    • Deutsche Bank has a Hold recommendation with a target price of $43.00. The analyst sees a smaller, better capital base as a completely viable strategy to the company if the right M&A activity doesn’t emerge. CEO says existing businesses present the best opportunities and shareholder retuns and valuation will be the key issues.
    • Morgans has a Hold recommendation with a target price of $47.34 (from $44.74). The analyst has maintained their view, believe management is doing a good job repositions towards stronger growth and higher-return businesses. They think M&A decisions will be very disciplined. Target price raised as Homebase earnings removed.
    • UBS has a Neutral recommendation with a target price of $43.00. The analyst notes management is happy to shrink to improve returns and performance outlook for Bunnings and department stores was better than they expected. Coles needs 20% more CAPEX and earnings headwinds are mounting
    • Credit Suisee has downgraded to a Neutral (from Outperform) recommendation with a target price of $47.31 (from $47.36). The analyst notes the clear emphasis on disciplined capital management and higher risk threshold. They see lots of internal opportunities and note earnings are supported by strength in chemicals, Bunnings and Kmart, they think recent share price performance is overdone.
    • Morgan Stanley has an Underweight recommendation with a target price of $39.00. The analyst thinks investors might be disappointed with lack of capital management and clarity on the balance sheet. They see headwinds from price deflation, new EBA and lower Coles Express earnings.

CHT2

  • Bapcor (BAP) – Morgan Stanley has an Overweight recommendation with a target price of $7.00. FY18 guidance was re-iterated at the MS conference and the analyst thinks there is scope to lift roll-out targets to 220-230 stores versus the current target of 220

CHT3

  • Costa Group (CGC $7.84) – UBS has a Buy recommendation with a target price of $7.50. The analyst has just toured CGC’s berry and avocado operations in FNQ and thinks FY18 guidance is conservative. They have strong growth forecasts in both and think the company will achieve its goal of 52-week supply across all categories.

CHT4

  • Fortescue Metals Group (FMG $4.74) – 19.9% holding in AGO
    • UBS has a Buy recommendation with a target price of $5.75. The analyst thinks the holding is not simply about the undeveloped resources, $500m tax loses, or lithium and manganese exposure, but an opportunity to buy into the North West Infrastructure JV, which is planning a new inner harbour development at Port Hedland. They are positive
    • Credit Suisse has an Outperform recommendation with a target price of $5.75. The analyst notes FMG will not support AGO/MIN scheme of arrangement. They mention the potential for FMG to emerge as a new lithium player, and note the economics of AGO’s existing iron ore operations are not overly compelling.

CHT5

  • Inghams (ING) CEO Peter Bush will step down after result in August. Macquarie has downgraded to a Neutral (from Outperform) recommendation with a target price of $4.00. The transition has come earlier than the analyst expected. No change in their outlook and shares are cheap but CEO uncertainty and clarity on FY19 outlook limit any upside.

CHT6


NEXT WEEK – Domestic employment data and an FOMC meeting f=dominate, but we also have an ECB and Bnak of Jpaan meeting as well as a big weel for Chinese data , employment and wages data in Europe and employment and inflation data in the UK, Not to mention G& getting underway today and the North Korean summit on 12 June.

  • It’s a holiday on Monday in Australia, but there are some important releases this week, including NAB business and Westpac consumer confidence, housing finance and the main event, employment data on Thursday.
  • Company evernts include an REA Group (REA) AGM on Tuesday, investor days for Challenger Group (CGF) and Link Administration (LNK) on Wedneday and an investor day for Goodman Group (GMG) on Thursday.
  • Lots on in China – Inflation is this weeken and then Thursday in particualr is full-on with Fixed asset investment, industrial production and retail sales.
  • The Bank of Japan meets on Friday, while key data during the week includes PPI on Tuesday and capacity utilisation and industrial production on Thursday.
  • The ECB also meets next week, on Thursday and expectaiton have been increasing that members are preparing for a hawkish policy shift with four key ECB members, including Bundesbank President Jens Weidmann, mentioned expectations eurozone inflation would reach the 2.0% target soon. Data includes employment and indsutrial production on Wednesday, and inflation and wages growth on Friday.
  • It’s huge in the UK with industrial and manufacturing producrion on Monday, employment data on Tuesda,y inflation on Wednesday and retail sales on Thursday.
  • The FOMC meets on Tuesday and Wednesday and a rate rise is almost 100% priced in…but there will be interest in any comments made in the press release.

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SHORT CHANGED

Macquarie Atlas Roads (MQA) moves to Atlas Arteria (ALX) so ignore the moves here for the top ob both lists. Pendall (PDL) is also a new name for BT Investment Management (BTT) so that can be ignored.

Of note is the significant building of shorts we are seeing in Greencross (GXL), with big moves in Nine Entertainment Group (NEC), G8 Education (GEM) and Technology One (TNE), which are susceptible to a short-covering rally. Myer (MYR) also interesting

We have seen some big short-covering in Afterpay Touch (APT), which explains its strong performance, with moves in BWX, APN outdoor (APO) and Retail Food Group (RFG) worth noting.

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OVERNIGHT

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SPI FUTURES -8

US EQUITIES – S&P500 -2 (-0.07%), Dow Jones +95 (+0.38%), Nasdaq -54 (-0.70%).

Main themes

  • Tech sector sold off after recent strength, while Energy sector outperformed.
  • McDonalds up over 4% gives Dow Jones a boost.
  • G7 meeting gets underway in Canada.

EUROPEAN MARKETS – Mostly lower.  STOXX 600 -0.24%, UK FTSE -0.10%, German DAX -0.15%, French CAC -0.17%. The Spanish market +0.38% was the exception

CURRENCIES

  • The US dollar was down 0.2% at 93.44.
  • The Aussie dollar has eased again, down to US76.27.

BONDS – Rallied, with flattening of the yield curve. 2-yr: -3 bps to 2.50%, 5-yr: -3 bps to 2.78%, 10-yr: -5 bps to 2.93%, 30-yr: -5 bps to 3.08%.

COMMODITIES

  • WTI oil futures up again, with WTI up US$1.22 or 1.9% to US$65.95. Key factors included concerns about Venezuelan production (reportedly a month behind) outweighed by comments from Algeria’s oil minister saying OPEC would focus on balancing market rather than production cuts.
  • Gold futures rose US$1.60 to US$1303.00.
  • Iron Ore – IRESS reports iron ore up US$1.50 at US$67.00 a tonne. The CommSec site says China Import (Fines 62% Fe) was down US5c to US$65.15/dry ton. (CFR Tianjin port)
  • LME metals – Mixed. Cu +1.55%, Ni -0.74%, Al -1.41%

ECONOMIC DATA, NEWS & POLITICS

  • US economic data – Weekly Initial Claims 222K (consensus 225K; prior 223K) and Continuing Claims 1.741m (prior 1.726m); Consumer Credit $9.30bn (consensus $13.90bn; prior $12.30bn)
  • US President Donald Trump and Japan’s Prime Minister Shinzo Abe held a joint press conference ahead of next week’s summit with North Korea.
  • Hawkish central banks – On Tuesday Reserve Bank of India Governor Urjit Patel wrote an op-ed in the Financial Times, calling on the Federal Reserve to slow the pace of its balance sheet reductions, which was followed by a rate rise yesterday. Yesterday Bank Indonesia Governor Perry Warjiyo said two rate hikes in May had helped stabilize the rupiah but more action could be needed.
  • European data – Q1 GDP +0.4% (as expected, last 0.4%) to be +2.5%yoy (as expected, last 2.5%), German Factory Orders -2.5% (expected 0.7%; last -1.1%), French trade deficit €5.00bn (expected deficit of €5.10bn; last deficit of €5.00bn)
  • UK May Halifax House Price Index +1.5% (expected 1.1%; last -3.1%) to be +1.9%yoy (expected 1.9%; last 2.2%)

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