MID MORNING MARKETS 20-7-18

The ASX200 is up 27 points in mid-morning trade, despite Trump Fed comments. Healthcare again strong, banks ok and Materials lag. APT still stunning (as in I’m stunned), AWC hurt by Aloca result. Next week inflation, ECB meeting and US GDP #ausbiz.

M5M6M7TODAY

  • Ex-dividend – Euroz (EZL) 9.3c
  • Public hearing by the Senate Committee on superannuation
  • Company News – Atlas Arteria (ALX) traffic stats, Sydney Airport (SYD) traffic stats
  • Japanese data – Inflation Rate, All Industry Activity Index

TONIGHT

  • US earnings – General Electric (GE), Honeywell (HON), Manpower (MAN), Stanley Black & Decker (SWK)
  • European data – Current Account
  • UK data – Public Sector Net Borrowing

COMPANY NEWS

  • Xero Holdings (XRO) – New strategic alliance with US payroll platform Gusto that will integrate XRO’s platform in the US with Gusto to provide customers access to full-service payroll in all 50 States. It means ceasing development of its US in-house payroll product, with a resulting NZ$16.2m non-cash impairment charge for 1H2019.
  • Sydney Airport (SYD) – June traffic stats. International passenger growth was strong (+5.0%), while domestic was flat. Key growth came from Taiwan, Vietnam, India, Indonesia and USA, all with double digit growth. Key points included the daily Virgin Hong Kong service (200K seats pa) and added capacity to Singapore, Jakarta and Noumea from Qantas from December (combined 116K seats pa).

M1M2

  • Oil Search (OSH)/Santos (STO) – News sales agreement PetroChina International (Hong Kong) Corporation Limited (PCI). The mid-term SPA is for 0.45mt of LNG pa over 3 years. This SPA takes the total contracted volumes from the Project to 7.0 MTPA, with 6.6 MT of PNG LNG’s annual output already committed under long-term contracts to JERA, Osaka Gas, Sinopec and CPC. OSH has a 29% interest on the PNG LNG project, Santos (STO) has a 13.5% interest
  • James Hardie (JHX) – New reporting segments. The new segments will be North America Fiber Cement, Asia Pacific Fiber Cement, Europe Building Products, Other Businesses and Research and Development. They have published comparable historical numbers but note that the change in reportable segments has no effect on the Company’s financial position, results of operations or cash flows.

M3

ANALYST CHANGES

  • Aurizon (AZJ $4.29) – The ACCC will seek to block the sale of its Queensland Intermodal assets, including an injunction against closing the business while the case is being determined. The ACCC has also instituted court proceedings against Aurizon and other parties.
    • Morgan Stanley has an Underweight recommendation with a target price of $4.00. The analyst said this is pretty much its bear case, which implies 6-9% price downside, based on a continuation of operating losses, lower sale proceeds and uncertainty.
    • UBS has a Buy recommendation with a target price of $4.60. The analyst was surprised about the proceedings for breach of competition law and for blocking the plan of closing down QLD intermodal. They don’t think the financial impact is significant but adds to the negative sentiment.

C1

  • Woodside Petroleum (WPL $34.20) – Production report.
    • Macquarie has a Neutral recommendation with a target price of $34.90. The report was in line with the analyst’s expectations, although revenue was lower than forecasts due to weak North West Shelf pricing. While WPL thinks it has a solution for third-party tolling of volumes that could have positive implications for Browse, the analyst suggests a toll deal, while close, is yet to be finalised.
    • UBS has a Buy recommendation with a target price of $13.50 (from $13.00). The analyst thought production was flat and the key takeaway was confirmation the North West Shelf partners are in agreement on terms and pricing for the processing of gas from other resource owners. With a preliminary agreement expected between NWS and Browse this quarter, they have increased confidence in Browse’ commercial viability.

C2

  • South32 (S32 $3.65) – June Q production
    • Citi has upgraded to a Buy (from Neutral) recommendation with a target price of $4.30 (from $3.80). The analyst has raised commodities prices forecasts, boosting EPS estimates, while buybacks and the weakening AUD are also positive.
    • Macquarie has an Outperform recommendation with a target price of $4.10. The analyst thought the production report was strong, with output of all key commodities ahead of their expectations (except alumina). They saw the recovery of two of the problem assets (Illawarra and Cannington) as encouraging and think S32 is cheap on earnings multiples, with upside to current forecasts at spot prices

C3

  • Santos (STO $6.06) – JunQ report
    • Macquarie has a Neutral recommendation with a target price of $6.00 (from $6.05). The analyst notes GLNG’s Fairview volumes were flat, with a number of high-rate wells off-line while Roma continues to ramp up. They think STO needs to demonstrate why $7 is an undervaluation in light of the Harbour Energy rejection but note that success in the Cooper, higher drill counts with less capital expenditure and the farm-in offer for P’nyang support the case.
    • UBS has a Sell recommendation with a target price of $5.55 (from $5.45). They say the key takeaway was lowered capex guidance, a potential upgrade to production guidance, and a proposal to farm in to P’nyang to provide greater alignment for PNG expansion. Revenue was boosted by a higher LNG price. They thinks management has done a good job of reducing costs, accelerating debt reduction and progressing growth opportunities, the broker believes, but that the share price implies the highest oil price among the majors

C4

  • Transurban (TCL $11.92) – The ACCC has delayed its decision date on whether Transurban is allowed to participate in the Westconnex tender until 6 September
    • Citi has a Sell recommendation with a target price of $10.52). The analysts believe a negative call on this will put pressure on Transurban’s trading multiples. They note that there is currently no value ascribed for potential Westconnex success.
    • UBS has a Buy recommendation with a target price of $13.35. The analyst believes the delay implies competition concerns and that the NSW government may move on without TCL. Conversely, there is unlikely to be a capital raising if they miss out. Overall they think the acquisition is very important for TCL’s ongoing pipeline given a knock-back would bring new competition into the market.

C5

  • Cocacola (CCL $9.58) – Citi has downgraded to a Neutral (from Buy) recommendation with a target price of $9.50 (from $9.70). The analyst is concerned about tougher times in Indonesia and PNG, with weaker sales and earnings. With much of the future growth expected to come from Indonesia, They have cut EPS estimates by 0.5% and 1.4% for 2018/19 and think there will be a re-rating.

C6


SHORT CHANGED

M4

The biggest increases in short positions over the last 4 weeks have been in Sigma Health (SIG +3.47%), JB Hi-fi (JBH +3.36%) and Ingham’s Group (ING +3.20%). JBH is now the second most shorted stock with 18.7% short sold. There was short covering in Beadell Resources (BDR -4.27%), Ardent Leisure (AAD -3.00%) and Gateway Lifestyle (GTY -2.73%).


OVERNIGHT

M10M11

SPI FUTURES -11

US EQUITIES – S&P500 -11 (+0.40%), Dow Jones -135 (-0.53%), Nasdaq -29 (-0.37%).

Main themes

  • Trump commented about Fed policy – Saying “I’m not thrilled” in reference to the tightening path of monetary policy, although he is “letting [the Fed] do what they feel is best”.
  • Banks lower as interest rates fell.

EUROPEAN MARKETS – Generally lower. STOXX 600 -0.23%, UK FTSE +0.10%, German DAX -0.62%, French CAC -0.56%.

CURRENCIES

  • The US dollar was up 0.1% at 95.16
  • The Aussie dollar is weaker at US73.60c.

BONDS – 2-yr: -2 bps to 2.59%, 5-yr: -3 bps to 2.74%, 10-yr: -3 bps to 2.85%, 30-yr: -2 bps to 2.97%

COMMODITIES

  • WTI crude futures closed up US70c or 1% at US$69.46. Saudi Arabia exports are expected to drop by roughly 100,000 bpd in August as it limits excess production. More bearish factors included news from the EIA that domestic crude production reached a record 11 million bpd, while inventories rose 5.8mb (3.6mb expected). The August contract expires tonight.
  • Gold futures were down US$3.90 at $1,223.90 due to strength in the US dollar.
  • Iron Ore – IRESS reports iron unchanged at US$66.50 a tonne. The CommSec site says China Import (Fines 62% Fe) was up US95c at US$64.70/dry ton. (CFR Tianjin port)
  • LME metals – Mostly lower. Cu -1.38%, Ni -2.02% and Al -1.28.

ECONOMIC DATA, NEWS & POLITICS

  • US earnings – Alcoa (-13.34%) lowered profit forecasts due to tariff hit, IBM (+32.7%), American Express (-2.73%), eBay (-10.12%), Blackstone (-1.63), BNY Mellon (-5.23%), Domino’s Pizza (-2.44%), Phillip Morris (-1.52%), After-market: Microsoft (+4.2% in after-hours trade). FactSet calculates that 13% of S&P 500 companies have reported and 85.1% of those firms have beat analyst expectations
  • US economic data – Weekly Initial Claims 207K (consensus 220K; prior 215K), Continuing Claims 1751K (prior 1739K), and July Philadelphia Fed 25.7 (consensus 22.0; prior 19.9). The dividing lines between expansion and contraction is 0. IT’s worth noting that the diffusion index for future general activity decreased for the 4th straight month to 29 from 29; June Leading Indicators 0.5% (consensus 0.4%; prior 0.2%)
  • The European Union Trade Commissioner Cecilia Malmstrom said the EU is preparing a list of goods for retaliatory tariffs
  • UK data – June Retail Sales -0.5% (expected 0.1%; last 1.4%) to be +2.9%yoy (expected 3.7%; last 4.1%). June Core Retail Sales -0.6% (expected -0.3%; last 1.4%) to be +3.0%yoy (expected 3.5%; last 4.5%)
  • Chinese Yuan – The State Administration of Foreign Exchange said it will make counter-cyclical adjustments to cope with short-term volatility in foreign exchange markets to maintain stability in the financial system. The Yuan is at a one year low.

M12

  • Employment data yesterday – Was generally better than expected, with last month’s numbers revised up as well. Big positive was rebound in full-time employment. Overall, there was strong growth in jobs, but this was met with increased participation.

M13


QUOTE OF THE DAY

“I think the really good mountaineer is the man with the technical ability of the professional and with the enthusiasm and freshness of approach of the amateur.” Edmund Hillary, New Zealander explorer born this day in 191. Died January 11, 2008. Same for investing, really!

M14

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