May 5, 2014

Morning Market Report

The market rose early in the session after strong jobs numbers but drifted throughout the day due to escalating violence in Ukraine.

The market is up 8 points. The Dow Jones was down 46 points at 16,513 -- The market rose early in the session after strong jobs numbers but drifted throughout the day due to escalating violence in Ukraine. Volume was below average in a 130-point range. US economic data was strong -- 288,000 jobs were created in April, better than the 215,000 forecast and the (upwardly revised) 203,000 jobs added last month. The unemployment rate fell to 6.3% from 6.7%, the lowest rate under President Barack Obama. But the participation rate fell, which was a concern for some economists -- if the participation rate had stayed constant, unemployment would have risen to 6.8% Ukraine weighed on markets -- fighting escalated in the region with Ukraine's government saying the country is now "at war” with pro-Russia insurgents. European share markets were mixed -- The UK FTSE was up 0.20% but the French CAC fell 0.65% and the German DAX fell 0.49% despite improved employment and manufacturing data. The Spanish 10-year bond yield fell below 3% -- the first time in nine years -- and almost reached the record low of 2.97%. The Aussie dollar was stronger and is currently trading at US92.84c. Gold rose US$19.50, or 1.52% to US$1,302.90 an ounce. Oil gained US$0.34 or 0.34% to US$99.76 a barrel. Iron ore rose US$0.60 to US$106.00 a tonne. Base metals were mostly stronger -- copper rose 1.22% and zinc rose 0.99%, but nickel was weaker, down 0.08%. US economic data -- Nonfarm Payrolls: Actual 288K, consensus 210K, prior 192K (revised 203K); Nonfarm Private Payrolls: Actual 273K, consensus 205K, prior 192K (revised 202K); Unemployment Rate: Actual 6.3%, consensus 6.6%, prior 6.7%; Hourly Earnings: Actual 0.0%, consensus 0.2%, prior 0.0% (revised 0.1%); Average Workweek: Actual 34.5, consensus 34.5, prior 34.5; Factory Orders: Actual 1.5%, consensus 1.5%, prior 1.6% (revised 1.5%) Global economic data -- Eurozone unemployment was 11.8% March -- it’s been unchanged since December. But the number of unemployed people fell 22,000. Australia had the lowest rate of unemployment at 4.9%, while the highest was Spain with 25.3% unemployed. Markit’s eurozone manufacturing PMI rose to 53.4 in April from 53.0. It’s the 10th positive month. Italy’s PMI rose to a three-year high and Spain was 1 basis point below a four-year high last month. France was the laggard, with its main index falling to 51.2. US earnings -- Chevron – down 0.18%, Marsh and McClennan -- down 1.44%, Newell Rubbermaid -- down 3.86%, CVS Caremark – up 1.05%  STORIES
  • AMP chief economist Shane Oliver says "continued speculation about the May 13 federal budget and the RBA’s monthly interest rate decision" are going to be the main influences on the local equity market this week. Oliver says the introduction of debt tax a major negative for equity markets. "If you start jacking people’s tax rates up they cut back spending. The last thing you want people to cut back spending because we need consumer spending to pick up from the rapidly receding mining investment boom. If you slug people with tax hikes it could actually weaken the economy, which means the budget deficit could actually end up looking a lot worse." Another broker says the effect of a tax will reduce household disposable income, in turn having a negative economic multiplier effect throughout the economy. The retail sector will be the hardest hit.
  • Goodman Fielder (GFF) -- Rumours are that Pacific Equity Partners (PEP) may be about to enter the battle for GFF -- it’s difficult to say whether there is anything behind the rumour but speculation of a takeover battle is positive for our trade.
  • Myer (MYR) -- We have to bite the bullet on Myer and sell it, it has cracked the 220c support level. Shares closed down 2.3% on Friday following their third-quarter sales figures, which came in lower than expected. Third quarter sales $646.5 million,  down 0.9% on year. The market was expecting third-quarter sales to come in around $663.5 million, which was a 1.7% increase and a 1.9% increase in like for like sales. The retailer says the weaker sales are due to disruptions from their store network from refurbishment programs. Although sales fell, like for like sales were up 0.24%. CEO Bernie Brookes is confident that brighter days are ahead with new store openings and refurbishments to help drive sales and profit increases in 2015. Surprisingly there are a few broker upgrades despite the numbers.
  • WBC (3487c) -- Earnings beat forecasts and the dividend was increased. 1H cash profit increased 8% to $3.77bn which beat consensus of $3.66bn. The interim dividend was 90c up from 86c. But some reports are hinting that the market may have been expected the announcement of a special dividend. Either way the overall result was good. Earnings drivers were the mortgage business and low default rates from borrowers, with numbers up across almost all business divisions except the institutional bank. CEO Gail Kelly said “We have recently seen signs of increased customer activity and expect the economy to gradually improve throughout the remainder of 2014.” Net interim margins fell 1bps compared to consensus of a flat result. Bad debt charges were 4bps below consensus.
  • Bendigo & Adelaide Bank (BEN) -- Have announced the purchase of agribusiness lender Rural Finance Corporation off the Victorian Government for $1.78bn. The deal will be funded with a $230m institutional capital raising. BEN will acquire their $1.695bn loan book, along with its 11 offices across Victoria. BEN shares are in a trading halt to allow for the capital raising. They will launch a 2nd placement plan for retail shareholders.
  • Aquila Resources (AQA 245) -- Aurizon Holdings (AZJ) and China's Baosteel Group Corp are looking to make a bid for AQA in a deal that values the company at around $1.4bn. They plan to jointly offer 340c a share for all shares in AQA they don’t own.

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