Jun 17, 2014

Morning Market Report

A reasonably steady day on the market despite conflict and tension in Iraq and Ukraine.

The market is down 16 points. The Dow Jones was up 5 points at 16,781 -- The market was weaker in the morning session and was down as much as 53 points before recovering in the afternoon. There were geopolitical concerns surrounding Iraq and renewed tension between Russia and Ukraine. Trading was uneventful in the lead up to Wednesday's FOMC meeting announcement, when policy direction will be updated along with economic and Fed funds rate projections. Energy, Utilities and Consumer sectors were the best performers while Financials and Materials lagged. The market traded in a 69 point range. US economic data better than expected -- All the data released last night was above expectations, including the NAHB housing market index (49 actual v 46 expected), industrial production (0.6% actual v 0.5% expected) and the New York Fed Empire manufacturing index (19.3 actual v 12.8 expected). The IMF cut the US growth outlook for 2014 to 2.0% (2.8% previous) as it expects rates to remain low for quite some time. Oil was little changed, down US$0.01 or 0.01% to US$106.90 a barrel. This was despite news that ISIS (Islamic State of Iraq and Syria) took over yet another city in northern Iraq and that Russia cut off its gas supply to Ukraine after the two countries failed to agree on pricing. Corporate activity -- Medtronic will acquire Dublin-based Covidien for $42.9 billion. Williams Companies will buy Access Midstream Partners for $5.99 billion. SanDisk will acquire flash storage device maker Fusion-io for $1.1 billion and Level 3 Communications will acquire internet services provider TW Telecom for $5.6 billion. European shares were weaker -- The UK FTSE was down 1.32%, the German DAX was down 0.29% and the French CAC was down 0.73%. The Aussie dollar was weaker and is currently trading at US93.97c. Gold was up US$1.20 or 0.09%to US$1275.30 an ounce. Base metals were mostly stronger -- zinc rose 0.78%, copper rose 0.58% and aluminium rose 0.30%. Nickel was up 3.23%. Iron ore fell US$1.90 or 2.1% to US$89.00 a tonne. Australian economic data today -- RBA minutes -- no major changes are expected from the "steady for now" message. No company events today. Dividends today -- Thorn Group (TGA) 6.5c. Key Events this week -- Domestically, the leading index is Wednesday and the RBA Bulletin is Thursday. In the US, there is a FOMC meeting tonight and Wednesday with a statement and press conference on Wednesday. CPI is on Tuesday and the leading index on Thursday. In Europe, consumer confidence is out on Friday. In the UK, the Bank of England meeting minutes are released Wednesday and retail sales are on Thursday. Not much on in China -- but property prices on Wednesday could be important. STORIES
  • Russia/Ukraine gas pricing negotiations -- Russia shut down gas supplies to the Ukraine after they failed to reach an agreement on pricing. Gasprom has also filed a lawsuit to try and recover US$4.5 billion owed by Ukraine. This increases the risk that Ukraine may default. A default may have an impact on parts of the EU banking system, although Ukraine is relatively small. Gasprom has said that gas supplies to the West would not be interrupted, but the EU are concerned about a repetition of the winter of 2009, when 18 EU countries experienced severe gas shortages after Russia stopped supplies through Ukraine. Russia supplies almost 30% of the EU’s gas and half of it travels through Ukraine. Ukraine have enough gas in underground chambers to last until December and recently struck a deal with Slovakia that allows Russian gas to be pumped from Slovakia to Ukraine, supplying around almost 20% of its gas needs.
  • Woodside Petroleum (WPL) -- Royal Dutch Shell have announced that they will sell the majority of their 23.1% stake in WPL for $6.1 billion. Shares have been placed in a trading halt. Shell is selling about 78.3 million shares to institutional investors over the next 24 hours and an equal number of shares back to WPL. 156.5 million shares traded represents a 19% stake in WPL and will leave Shell with a remaining holding in the company of around 4.1%. Shell said the sale "doesn't change our view of Australia as an important player on the global energy stage, or Shell's central role in the country's energy industry." WPL’s buyback price is at 3649c and is at a 14% discount to the volume weighted average price of its stock in the past week. The sell down is expected to be finished before the start of trading on Wednesday. It will be funded from existing cash and debt facilities.
  • Virgin Australia (VAH) -- Air New Zealand has increased its stake in VAH to 25.9% which is the maximum allowed by the FIRB.
  • LNG -- Up another 12% in early morning trade, continuing its stellar run. LNG is up 70% since last Tuesday, up 160% since this time last month and is up 625% since the start of the year. The company has caught the eye of institutional investors, especially US hedge fund manager Baupost who have started to emerge as a major shareholder. LNG's Magnolia Project in the US is the company's main attraction.

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