MID MORNING MARKETS 15-6-18

The ASX200 is up 59 points in strong mid-market trading following a dovish ECB statement. All sectors are in positive territory, Telcos leading. FMG the key underperformer. Quiet next week, with BofE, OPEC and TLS in focus. #ausbiz

MMM4 MMM5 MMM6

TODAY

Chinese – House Price Index
BoJ Interest Rate Decision

TONIGHT

European – Balance of Trade, Inflation Rate, Labour Cost Index, Wage Growth
US economic data – Empire Manufacturing, Industrial Production, Capacity Utilization, Net Long-Term TIC Flows

COMPANY NEWS

BHP Billiton (BHP) – Has approved US$2.9bn in capex for the South Flank project in the central Pilbara, WA. South Flank will fully replace production from the 80 Mtpa (100 per cent basis) Yandi mine which is reaching the end of its economic life. First ore from South Flank is targeted in the 2021 calendar year, with the project expected to produce ore for more than 25 years. South Flank iron ore will contribute to an increase in WAIO’s average iron grade from 61% to 62%, and the overall proportion of lump from 25% to approximately 35 per cent.
CIMIC (CIM) – Awarded $260m contract by BHP Iron Ore to deliver the construction of bulk earthworks, concrete and underground services for the South Flank project in Western Australia’s Pilbara region, from July to September 2020
Sirtex (SRX) – The Board views an updated CDH-CGP Proposal as superior to the Varian Scheme and is in the best interests of Sirtex shareholders. It is for A$33.60 with a dividend up to 30c, a 78% premium to share price prior to the Varian offer.

ANALYST CHANGES

Class1 (CL1) – UPS has upgraded to a Buy (from Neutral) recommendation with a target price of $2.95 (from $2.85). CL1 is offering fee holidays for new accounts to 1 January 2019 to address competition. The analyst notes this will add to acquisition costs and reduce FY19 EBITDA by $2m, but it may support a faster transition to cloud-based SMSF software with market share benefits and the valuation has improved.

CHT1

Bank of Queensland (BOQ) – Credit Suisse has upgraded to an Outperform (from Neutral) recommendation with a target price of $11.40. The analyst notes the challenging environment, but thinks BOQ now represents good value.

CHT2

Appen Group (APX $12.52) – Bell Potter has downgraded to a Hold (form Buy) recommendation with a target price of $12.50 (from $12.00). While acknowledging that there is further upside risk to guidance, particularly due to favourable currency moves, and upgrading its target price, the current share price reflects the current growth profile.

CHT3

Blackmores (BKL $142.30) – Credit Suisse has a Neutral recommendation with a target price of $130.00. The analyst says investment in China will increase, with the Chinese vitamin/suppl market at US$20bn. They have lowered estimates for FY19-21, projecting flat margins at around 19% and makes the comment that marketing spend versus rival Suisse continues to lag.

CHT4

Incitec Pivot (IPL $3.45) – Has taken over the contract for supplying ammonium nitrate to FMG. Expected combined impact (with other mitigating actions) on NPAT: FY18 – no change to amounts previously disclosed; FY19 + $6m (adverse NPAT impact has reduced from $16m to $10m); FY20 + $15m (adverse NPAT impact has reduced from $32m to $17m); FY21 + $24m (adverse NPAT impact has reduced from $43m to $19m); FY22 + $9m (adverse NPAT impact has reduced from $20m to $11m.
- Credit Suisse has an Underperform recommendation with a target price of $3.37 (from $3.39). The market is likely to remain in oversupply until 2025, and the analyst thinks contract pricing is likely to be re-set lower, implying reduction to profit of around -$100m per annum.
- Macquarie has an Outperform recommendation with a target price of $3.91. The analyst notes the new contract goes around half way in mitigating the impact of lost BHP and Roy Hill contracts. They also expect the current buy-back (3% left) to end by FY-end (Sept).

CHT5

Nib Holdings (NHF $5.47) – Credit Suisse has upgraded to a Neutral (from Underperform) recommendation with a target price of $5.35 (form $5.65). The analyst has lowered FY19 estimates by 0.1% based on premium rate increase assumptions. While they aren’t positive, the share price has fallen to fair value, hence the upgrade.

CHT6

Medibank Private (MPL $2.90) – Credit Suisse has a Neutral recommendation with a target price of $3.10 (from $3.25). The analyst has lowered FY19 estimates by 0.3% based on premium rate increase assumptions. They don’t believe there is enough near-term growth to support a more positive view.

CHT7

Mineral Resources (MIN $16.74) – Morgan Stanley has an Overweight recommendation with a target price of $23.60. The WA gov’t confirms it does not have priority in developing South West Creek and the analyst notes this removes a key motive for anyone acquiring the company.

CHT8

SHORT CHANGED REPORT

MMM1

Macquarie Atlas Roads (MQA) moves to Atlas Arteria (ALX) so ignore the moves here.
Of note is the significant building of shorts we are seeing in Greencross (GXL), altohugh this has eased in the last week, while other increases were seen for iSelect (ISU) and Nine Entertainment Group (NEC).
We have seen some big short-covering in APN Outdoor (APO), Retail Food Group (RFG) and BWX (although both of these saw slight increases over the last week).

NEXT WEEK – It’s relatively quiet on the economic front, with the key items of interest the RBA meeting minutes, Bank of England meeting and lots of housing-related data in the US. The other key agenda items are the Telstra (TLS) investor day on Wednesday and the OPEC meeting on Friday

Domestically, the minutes from the RBA meeting are released next Tuesday, followed by the RBA Bulletin on Thursday. Data-wise, the ABS’s house price index is out on Tuesday. We’ve already had the much more timely CoreLogic series so the house price data is unlikely to add much to the housing story. Then we have the leading index on Thursday and new home sales on Friday.
Nothing in China.
The minutes from the most recent Bank of Japan are released on Wednesday. In terms of data, there is trade data on Monday and inflation on Friday.
The European PMI indices are out next Friday.
The Bank of England meets on Wednesday. Recent weaker economic data and Brexit concerns mean there is little expectation of a rate rise at this meeting.
US economic data centres around the housing market, with the housing market index on Monday, housing starts and building permits on Tuesday, existing home sales on Wednesday and house prices on Thursday.

MMM2 MMM3

OVERNIGHT

MMM10 MMM11

SPI FUTURES +33

US EQUITIES – S&P500 +7 (+0.25%), Dow Jones -26 (-0.10%), Nasdaq +65 (+0.85%). .

Main themes –

ECB statement considered to be dovish, leading to US dollar rally
Retail sales stronger than expected (up 0.8% vs 0.4% exp)
Flatter yield curve after rally at the long end was negative for financials
Tariffs on US$50bn of Chinese products expected to be announced tomorrow

EUROPEAN MARKETS – Stronger. STOXX 600 +1.23%, UK FTSE +0.81%, German DAX +1.68%, French CAC +1.39%

CURRENCIES

The US dollar was up 1.2% to 94.87 on dovish ECB comments
The Aussie dollar is significantly weaker at US74.77c.

BONDS – Rallied with flattening of the yield curve. 2-yr: +2 bps to 2.58%, 5-yr: -2 bps to 2.82%, 10-yr: -3 bps to 2.95%, 30-yr: -3 bps to 3.07%

COMMODITIES

WTI oil futures were up US25c at US$66.89 ahead of next week’s OPEC meeting. The Russian Energy Minister Alexander Novak told reporters that members of the OPEC-plus production cut deal can consider returning up to 1.5 million bpd to the market gradually. In other oil news, major Libyan oil ports of Ras Lanuf and Es Sider were closed and evacuated on Thursday due to attacks by armed brigades, causing a production loss of 240,000 bpd.
Gold futures were up 0.5% to US$1,308.30.
Iron Ore – IRESS reports iron ore unchanged at US$67.50 a tonne. The CommSec site says China Import (Fines 62% Fe) was up US30c to US$66.00/dry ton. (CFR Tianjin port)
LME metals – Significantly weaker. Cu -1.10%, Ni -2.18% and Al -0.84%.

ECONOMIC DATA, NEWS & POLITICS

ECB – Will begin tapering asset purchases in September by €15m per month, with the final round of purchases expected in December. The first rate hike not expected until September 2019, longer than the expected July.
US economic data – Export Prices ex-agriculture 0.5% (prior 0.7%), Import Prices ex-oil 0.6% (prior 0.2%), weekly Initial Claims 218K (consensus 223K; prior 222K), Continuing Claims 1697K (prior 1741K), Retail Sales 0.8% (consensus 0.4%; prior 0.4%), and Retail Sales ex-auto 0.9% (consensus 0.5%; prior 0.3%); Business Inventories 0.3% (consensus 0.3%; prior 0.0%)
German politics – Reuters report suggesting CSU and Angela Merkel’s CDU are on the verge of breaking up their alliance. The report was refuted quickly, with CSU saying no one is demanding an end to cooperation between the parties
European data – German CPI +0.5% (as expected, last 0.5%) to be+2.2%yoy (as expected, last 2.2%)
UK Retail Sales +1.3% (expected 0.5%; last 1.8%) to be +3.9%yoy (expected 2.4%; last 1.4%). Core Retail Sales +1.3% (expected 0.3%; last 1.4%) to be +4.4%yoy (expected 2.5%; last 1.4%)
Weak Chinese data yesterday – fixed asset investment, industrial production and retail sales were all lower than expectations