MID MORNING MARKETS 11-7-18

The ASX200 is down 29 points in mid-morning trade after the US announced new tariffs on $200bn of imports from China. Banks and Materials lower, consumer stocks up. ACCC targets AGL and ORG. NEA results, NVL trading downdate. Housing data and APRA speech ahead and a big night for central bank speeches. #ausbiz

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  • Economic data – Westpac Consumer Confidence Index, Home Loans
  • APRA – APRA Chairman Wayne Byres speaks at a Lunchtime Briefing of the Australian Business Economists (ABE)
  • Japanese data – Machinery Orders, PPI
  • Chinese data – Vehicle Sales

TONIGHT

  • BoE Gov Carney Speech
  • ECB Draghi Speech
  • EU-Japan Summit
  • US economic data – PPI, Wholesale Inventories, CPI

MARKET NEWS (after close of Wall St)

After market, Trump Administration announced it would published a list of $200bn of exports subject to new tariffs. Products identified in China’s 2020 report. Tariffs will be at 10% of these goods and reference has been made to the impact on US consumers. The Aussie dollar fell on the announcement while SPI futures dropped around 20 points to +6

COMPANY NEWS

  • AGL – ACCC report on the energy sector. Includes a series of reforms across generation, transmission and retail to restore efficiency, fairness and competition to the national electricity market. Generators with retail operations (gentailers) targeted for charging large premiums on the sale of wholesale electricity to their retail arms. The recommendation include capping any further merger or acquisition by a company with more than 20% generation market share. New generation capacity would need to be built to grow. The restriction would include AGL and Origin in NSW, and AGL in Vic.
  • National Veterinary Care (NVL) – FY18 Results Update. NVL has experienced strong revenue growth in FY2018 and expects underlying revenue of $81.5-$82.3m, but weaker trading conditions in the final two months of the year have affected underlying EBITDA margins. Key issues: 1. Revenue across the general practice clinics was below expectations in May and June, affecting underlying EBITDA margin; 2. Good progress has been made on recruitment initiatives particularly over the last quarter. However, a cost/wage management initiative has taken longer to implement than forecast; 3. The effect of three recent acquisitions settling later than initially forecast impacted on projected revenue in the last quarter. Two of these acquisitions settled late in the fourth quarter, with the third expected to settle by 31 July 2018. All resulting in a slight reduction in FY18 guidance.

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  • Nearmap (NEA) – Preliminary results. ACV (annualised contract value) portfolio up 41% to $66.2. US portfolio more than doubled, growing 143%.

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  • Corporate Travel (CTD) – Trading halt pending an announcement about an acquisition and capital raising.
  • Resolute Gold (RSG) – Ravenswood expansion project update. Significant enhancements have been made to Ravenswood Expansion Project; All required approvals received to allow Buck Reef West to be prioritised in mine plan; Life of Mine All-in Sustaining Cost reduced to A$1,097/oz (US$823/oz); LOM average production of ~115kozpa of gold; Mine life extended by three years to 2032; Staged development plan has been optimised with FY19 capital requirement of only A$33 million; Major expansion capital deferred through changes in mine sequencing; Ravenswood confirmed as a long life, low risk, low cost project.
  • Ruralco (RRL) – Market update in relation to concerns about seasonal conditions. Expects FY underlying NPAT of $26-29million (FY17: $26.2m). The mid-point of this range is consistent with current market consensus uNPAT of $27.8m. Key issues are dry conditions in Queensland and northern New South Wales and the delayed autumn season break (identified at 1H results) have curtailed crop protection sales in the 3Q, whilst recent rainfall across Western Australia, southern Australia and Tasmania should be positive for rural supplies activity in these markets over 4Q. Continuing the 1H trend, a buoyant wool and sheep market and stable cattle volumes in the third quarter have partially offset the impact from decreases in cattle prices
  • Village Roadshow (VRL) – Trading halt continues
  • Dacian Gold (DCN) – Trading Halt pending an announcement regarding a proposed capital raising transaction to fund the advancement of the Company’s exploration programs and cancellation of a production royalty relating to the Jupiter Mine

ANALYST CHANGES

  • Bluescope Steel (BSL $17.82) – Macquarie has an Outperform recommendation with a target price of $21.50 (from $19.60). The analyst believes macro conditions are supportive despite the risks and uncertainty of US trade policy and they’ve raised FY19 estimates by 35% on higher steel spread assumptions. Technically, there looks to be a loss of momentum. Nothing scary, but the fall in the MACD indicator (the blue bars) combined with the red line hovering below the oversold level of 70 suggest some potential consolidation.

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  • Flight Centre (FLT $62.25) – Morgan Stanley has an Equal-weight recommendation with a target price of $68 (from $54.00). The analyst notes the successful transition of the business from leisure focus to 50/50 leisure/corporate, as corporate customers find its services faster, cheaper and more efficient. They think the corporate arm is more defensive and there is opportunity for growth in the US (currently 10% of earnings) They are positive for FLT’s results. Technically, shares are looking toppy, with early indictions of a loss of momentum.

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  • Village Roadshow (VRL $2.18) – Has raised $50m and will use this and the proceeds from selling Wet ‘n’Wild to repay debt.
    • Macquarie has a Neutral recommendation with a target price of $2.00 (from $2.65). The analyst sees scope for further asset sales, and thinks earnings visibility in the near term is challenging – although this should improve through FY19.
    • There are early technical indicators of a bounce, with the MACD indicator (the blue line) about to cross into positive territory and the RSI (the red line) looking close to moving above the oversold 30 level. Certainly one to watch for a trade.

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  • Mineral Resources (MIN $15.64) -.Technically, no reason to get involved, although a trun of the MACD indicator (the blue line) might suggest a short term trade.
    • Macquarie has no rating due to research restriction. The analyst notes MIN will wind back DSO as part of its Wodgina lithium disposal process, with shipments to cease at the end of 2018. They suggest the acquisition of the Cliffs Australian iron ore assets has potential to extend the life of the Csarina iron ore project. Incorporating changes to commodity price forecasts and guidance on DSO shipments they have reduced FY18, FY19 and FY20 earnings estimates by 21%, 25% and 29% respectively.
    • Morgan Stanley has an Overweight recommendation with a target price of $21.50. Shipment numbers are in line with FY18 guidance (1.4% lower). The analyst notes that shipments have disappointed but have been well flagged.

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  • Pendal Group (PDL $9.56) – FUM report disappointed. AUS net inflows of $0.4bn, BT/WBC outflows of $0.4bn, JOHCM had net outflows of $1.1bn  – net outflows in European (-$0.7bn) and Asian (-$0.3bn) OEIC funds. The effect of the net flows during the June quarter on Pendal Group revenue is a decrease to annualised fee income of $5.8m. Performance fees for the year ended 30 June 2018 were $6.9m compared to $9.4m for the 2017 financial year. Shares looked to be about to break the downtrend from May last year but this has faltered and the indicators are now neutral
    • Morgans has downgraded to a Hold (from Add) recommendation with a target price of $11.00 (from $11.60). The analyst thinks risk is relatively minor, although some risk of small outflows in the coming six months. They believe the prospect for further outflows, concentration of performance fees, high fixed cost growth and the potential sell down by WBC will weigh on sentiment

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OVERNIGHT

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SPI FUTURES +16

US EQUITIES – S&P500 +10 (+0.35%), Dow Jones +143 (+0.58%), Nasdaq +3 (+0.04%).

Main themes

Focus has begun to turn to the upcoming earnings season. Forecasts are for earnings growth of 20%yoy after 1Q earnings rose 24%yoy. PepsiCo (+4.76%)

EUROPEAN MARKETS – Mostly stronger. STOXX 600 +0.43%, UK FTSE +0.05%, German DAX +0.53%, French CAC +0.67%. Spain -0.38% the exception.

CURRENCIES

  • The US dollar was a little stronger at 94.15
  • The Aussie dollar is weaker at US74.28c.

BONDS – 2-yr: UNCH at 2.57%, 5-yr: +2 bps to 2.77%, 10-yr: +1 bp to 2.87%, 30-yr: UNCH at 2.97%

COMMODITIES

  • WTI crude futures closed up 26c to US$74.11. Initial strong gains eased after US Secretary of State Mike Pompeo said the US will consider extending sanctions relief to some buyers of Iranian oil. Other factors included a strike in Norway and falling production in Libya.
  • Gold futures were down US$4.20 at $1,255.40.
  • Iron Ore – IRESS reports iron unchanged at US$66.50 a tonne. The CommSec site says China Import (Fines 62% Fe) was down 5c at US$63.20/dry ton. (CFR Tianjin port)
  • LME metals – Mostly lower. Cu -0.90%, Ni -0.42% and Al -1.46%

ECONOMIC DATA, NEWS & POLITICS

  • US economic data – NFIB Small Business Optimism Index 107.2 (prior 107.8); May JOLTS – Job Openings 6.638m (prior 6.840m)
  • Tesla – Will build a factory in China.
  • US Earnings season – 20 companies (of the S&P500) have reported. 86% of those have exceed expectations, with 24%growth yoy. Citigroup, JPMorgan Chase and Wells Fargo report on Friday.
  • European data – ZEW Economic Sentiment -18.7 (expected -13.2; last -12.6); German ZEW Current Conditions 72.4 (expected 78.2; last 80.6) and ZEW Economic Sentiment -24.7 (expected -18.0; last -16.1); French Industrial Production -0.2% (expected 0.7%; last -0.5%); Italian Industrial Production +0.7% (expected 0.9%; last -1.3%) to be +2.1%yoy (expected 2.7%; last 1.9%)
  • UK data – Trade deficit £12.36bn (expected deficit of £12.00bn; last deficit of £12.40bn), Industrial Production -0.4% (expected 0.5%; last -1.0%) to be +0.8%yoy (expected 1.9%; last 1.6%); Manufacturing Production +0.4% (expected 0.9%; last -1.3%) to be +1.1%yoy (expected 1.9%; last 0.9%); Construction Output +2.9% (expected 0.4%; last 0.5%) to be +1.6%yoy (expected -0.5%; last -1.2%). May GDP +0.3% (as expected, last 0.2%)
  • Chinese data yesterday – another small drop in consumer prices of 0.1% for the month, leading to annual inflation of 1.9%. PPI came in stronger than expected at 4.7% yoy. CPI has been much more stable than PPI over the last 5 years.

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  • Australian interest rates to rise – Former RBA economist Jeffrey Carmichael in the AFR today calling for the RBA to move “sooner rather than later” to raise interest rates, citing the vulnerability of the economy if rates lag global peers due to capital flight and arguing current low rates limit the RBA’s “ammunition” to stimulate the economy if conditions deteriorate.

QUOTE OF THE DAY

“Courtesy is the one coin you can never have too much of or be stingy with.” – John Wanamake, American businessman born this day in 1838. Died 12 December 1922.

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