MID MORNING MARKETS 30-05-19

The ASX 200 is down 44 points in mid morning trade as markets come to grips with “don’t say we didn’t warn you” rare earth warning. Gold the only +ve sector. CGC guidance downgrade. TLS ↑ again on write ↓/impairment. CAPEX today. #ausbiz

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m3.pngTODAY

  • Ex-dividend – CSR 13.0c, Gryphon Capital Income Trust (GCI) 0.9c, Orica (ORI) 22.0c, Premier Investments (PMV) 33.0c, Qualitas Real Estate Income Fund (QRI) 0.7c, Ruralco Holdings (RHL) 10.0c, Technology One (TNE) 3.2c
  • Economic data – Building Permits, Private Capital Expenditure

TONIGHT

  • UK data – Nationwide Housing Prices, Gfk Consumer Confidence
  • US economic data – Adv. Intl. Trade in Goods, Adv. Retail Inventories, Adv. Wholesale Inventories, GDP – Second Estimate, Pending Home Sales

COMPANY NEWS

  • Bendigo Bank (BEN) –  Jacqueline Hey will be the next Chair.
  • Costa (CGC) – AGM and outlook statement. Trading environment through March and April was generally favourable with an improved outlook for a number of our categories including  tomatoes, avocados and berries, and good prospects for the forthcoming citrus season. Through May though, facing a deteriorating operating environment on a number of fronts which taken collectively are likely to impact the (calendar) full year results. Full calendar year results will be above prior year but below our earlier expectations. Updated guidance of an EBITDA-SL range of $140-153m, compared to the pro forma CY18 EBITDA-SL result of $125 million, and an NPAT-SL range of $57-66m. (CY18 NPAT-SL was $56.6 million and previous guidance was CY2019 NPAT-SL growth of at least 30% which would have given $73.6m).
  • APA Group (APA) – MOA signed between Vintage Energy Ltd (VEN), APA and Comet Ridge Galilee Pty Ltd (COI). APA will undertake a work program to identify a pipeline route to connect the Galilee Basin in Queensland to Australia’s east coast gas markets (Figure 1). APA’s proposed route to market will also allow for gas to be supplied to the large mining projects planned for the Galilee Basin giving them an alternative to using diesel for their operations.

BROKER CHANGES

  • Telstra (TLS) – Yesterday announced good progress on its T22 strategy. Expects to make a non-cash impairment and write down of the value of its legacy IT assets by around $500m. And increases guidance on its restructuring costs for FY19 by around $200m (to $800m). On track to reach net cost out target of $2.5bn by the end of 2022. Telstra has reaffirmed its FY 2019 guidance of $8.7-9.4bn.
    • Credit Suisse has a Neutral recommendation with a target price of $3.25 (from $3.15Has guided to $350m restructuring beyond FY19 when the analyst previously had a $100m forecast. While higher, guidance does provide more certainty on the cost of the restructure required to achieve the company’s $2.5bn cost-out goal. Write down of its legacy IT assets by $500m will result in a reduction in D&A expense in latter years. Lower earnings due to increased restructure costs do not impact the broker’s valuation as they are one-off in nature
    • Deutsche Bank has a Buy recommendation with a target price of $3.80 (from $3.70). Deutsche Bank is positive about the acceleration of the company’s T22 restructuring charges and the $500m non-cash impairment of legacy IT assets. Additionally, Telstra has reiterated FY19 guidance. The broker maintains a Buy rating and increases the target by 3% to $3.80.

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  • Sigma (SIG) – Citi has upgraded to a Neutral (from Sell) recommendation with a target price of 52c. Since its FY19 result, Sigma has entered into a new community service obligation deed with the Commonwealth government which has provided some certainty around payments until at least June 2020. Also, the company has provided more clarity around the cost reductions in relation to the loss of a major contract. Finally, with the re-election of the Coalition this suggests the government will be more supportive of existing regulations around the pharmacy distribution industry.

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  • Flight Centre (FLT) – Macquarie has a Neutral recommendation with a target price of $43.70 (from $37.60). The Macquarie analyst has surveyed 40 travel agents, airlines and hotel operators to gauge recent travel trends. The consensus view is that conditions are subdued for both domestic and international travel. Global political uncertainty and corporates mandating travel freezes of varying degrees are having an impact. Price deflation amongst hotel operators and airlines globally has persisted, dampening any rebound in volume. Macquarie believes, despite valuation support, structural and cyclical issues continue to weigh on Flight Centre and expectations of a recovery in FY20 are optimistic.

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  • Bluescope Steel (BSL) – Credit Suisse has an Outperform recommendation with a target price of $15.90. As iron ore prices soar and steel spreads collapse, BlueScope has cut its FY20 earnings guidance to $930m from a prior $1038m. Falling spreads puts the focus on the company’s pending decision on Northern Star expansions. BSL had indicated it would distribute at least 50% of free cash flow to shareholders, but this may now be undermined by spending on Northern Star, were the decision to be to proceed with expansion.

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OVERNIGHT

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SPI FUTURES -31

US EQUITIES – S&P 500 -19 (-0.69%), Dow -221 (-0.87%), NASDAQ -60 (-0.79%).

Major themes

  • Trade war developments – Chinese media stating “don’t say we didn’t warn you.”
  • Further rally in bonds – the 10 year yield at 2.23%, -3bp.
  • Stocks bounced in the last hour

EUROPEAN MARKETS – All lower. STOXX600 -1.43%, German DAX -1.57%, French CAC -1.57%

CURRENCIES

  • The USD is stronger at 98.13.
  • The Aussie dollar is little changed at US69.13.

BONDS – 2-yr: -4 bps to 2.08%, 3-yr: -4 bps to 2.02%, 5-yr: -3 bps to 2.04%, 10-yr: -3 bps to 2.23%, 30-yr: -4 bps to 2.67%. The 3 month rate is 2.36%.

COMMODITIES

  • Oil – Brent settled down US51c or 0.6% to US$58.81.
  • Gold futures were up 0.3% to US$1,281.40 an ounce
  • Iron Ore – IRESS has iron ore up US$5.00 at US$1111.00 a tonne. CommSec has iron ore down US$2.60 or 2.5% to US$103.50 a tonne.
  • LME metals – Mixed. Cu -1.28%, Ni -0.70, Al -0.36%

ECONOMIC DATA, NEWS & POLITICS

  • Fed out of step with markets – The Fed has said it intends to be patient but the CME FedWatch Tool is now registering an expectation for two rate cuts before the end of January 2020.
  • Weekly MBA Mortgage Index -3.3% (prior 2.4%)
  • Currency manipulations – US Treasury has identified Ireland, Italy, Malaysia, Singapore, Vietnam, China, Germany, Japan, and South Korea as warranting extra scrutiny due to their currency practices. But no major trading partner met the currency manipulation criteria.
  • The Aussie 10-yr yield hit a fresh record low (1.48%), below the cash rate, amid continued speculation of further RBA cuts.
  • Italian debt – EU Parliament President Antonio Tajani said it may take years before the EU can sanction Italy over its debt levels.
  • Italy’s Deputy Prime Minister Luigi Di Maio will hold an online vote on his role as party leader tomorrow. The decision was made after Mr. Di Maio’s MoVimento 5 Stelle saw a sharp drop in popularity during last weekend’s election to the EU Parliament.
  • European economic data – German Unemployment 5.0% (expected 4.9%, prior4.9%), representing the first increase since 2013, Italian Business Confidence 102.0 (expected 100.4, prior 100.8), Consumer Confidence 111.8 (expected 110.0, prior 110.6).

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