With holidays in the US and UK, markets were fairly calm in the past 24 hours without the guidance that London and New York could give.
The SPI 200 suggests a small fall of 7 points at the open after yesterday’s predictable but still disappointing performance for local stocks – particularly the banks. But while the index level move is a tad boring that doesn’t mean there wasn’t still plenty of action in the underlying stocks.
On forex markets, it was quiet except for the yen which is losing ground and back above 111 as it’s clear Japan is still mired in the economic mud and the US is about to raise rates. James Bullard was on the hustings again saying markets are ready for the Fed to move. The Aussie is unchanged and waiting for the GDP tomorrow.
On commodities, gold is under pressure, crude is holding firm and copper dipped back. Iron ore had another day to forget.
Here’s the scoreboard (8.02am):
- Dow: Closed
- S&P 500: Closed
- SPI200 Futures (June): 5,405, -7 (-0.1%)
- AUDUSD: 0.71780 +0.0005 (+0.01%)
Now, the Top Stories
1. Here’s what Telstra and Blackmores’ woes tells us about investing in 2016. The convergence of trouble for two very different companies yesterday highlights the difficulty of “brand” in the new economy. That in turn complicates the valuation story for investors.
Take Telstra for example. Morgan Stanley analysts put out a note saying that where previously the reliability and stability of the Telstra network allowed them to charge a premium of 10-15% over rivals – one which customers were happy to pay – recent outages mean the “effective premium is now jumped up to 40%”. That means they are going to lose market share, Morgan Stanley say. Alternatively, they will need to lower their charges and as a result, suffer margin squeeze.
It made me think about the trouble of marketing, perceptions, and brand extension, and that lead me to think about Blackmores’ woes. Yesterday we learnt that Chinese buyers haven’t embraced the company’s move into the the infant formula market in the same way they have embraced the company’s vitamin business.
Two separate companys in two different markets appearing to take customers for granted and suffering the consequences. We might be in a new digital age but the basics of business – understanding your market and your customers – hasn’t changed.
2. How low could Blackmores shares go? Just a few months ago, Blackmores surged through $200 on the back of the hype around its China operations. It made a high a little shy of $221 a share in early January, yet last night it closed at $151.50. Shareholders are sitting on a 30.5% year to date loss.
They’ll be wondering what the heck has gone wrong and while it’s easy to blame management for missteps like the baby formula news yesterday, the reality is management can’t be blamed for the bandwagon effect that gripped Blackmores’ share price. That chase for stock drove the price away from its trend and prices are now reacting. They are also in a down trend, which suggests BKL shareholders might have to watch prices slide toward $130 before they know if the old trend will hold.
3. It’s not all bad news for the banks – the majors’ funding costs are falling. It was really interesting yesterday that the banks were leading the race to the bottom on the ASX. Perhaps it was weak company profits, and what theat maybe suggests about bank corporate and commercial loans books. Or perhaps it was the article by Satyajit Das saying the banks are more vulnerable than many think.
What’s interesting about the weakness in the banks is that there was actually some uncommonly good news. While Das worries about the banks’ access to funds, Deutsche Bank reported that funding costs for the big four are actually falling. Andrew Triggs and Anthony Hoo said in a note to clients that indicators of wholesale funding costs have improved over the past month.
“The average major bank CDS spread (5yr USD senior) improved by 12bps over the past month, as market conditions continued to recover from the volatile January/February period. This improving trend has been continuing since we last saw elevated CDS spreads in February. At the current level, we believe front book long-term wholesale funding costs are likely to be close to, or possibly below, back book levels. If these spreads are sustained it likely removes a potential headwind to bank margins which we had feared given movements earlier this year.”
Good news for the banks and their borrowing customers.
5. Iron ore’s slump could go further. Australia is more than just houses and holes. But the federal budget balance has a certain level of elasticity to movements in the price of iron ore. So it’s interesting that the G7 announced over the weekend it was going to look into the global steel market.
In no small way that is a pop at China and rampant Chinese steel production, which as David Scutt pointed out yesterday, saw China produce nearly eight times more steel than any other nation in 2015. And of course, where steel production goes, so goes iron ore from Port Hedland.
It all means that the recent rally looked, and is now proving to be, tenuous. Iron ore fell again yesterday and Scutty says it’s now lost 28.7% since April 21. He has a cracking chart in his post on the move which any casual observance would suggest could continue to collapse.
5. Could OPEC surprise this week? It feels like I’m the only person out there who thinks that the oil putsch we saw in Saudi Arabia, which saw 20-year veteran Ali Al-Naimi thrown out in favour of Khalid al-Falih, chairman of the state oil giant Saudi Aramco, could potentially be accompanied by a change in strategy from the Saudis with regard to OPEC and oil prices.
Over the past week and then again in what I read over the weekend, and saw on Sky yesterday and this morning, analyst after analyst says this is a dud meeting and nothing will happen.
I could be 100% wrong here but years in markets have taught me that when everyone is on one side of the trade, the risk of a reversal is high. The question of course is whether any change in strategy is already reflected in the price up here near $50 a barrel. But one thing niggles me – why have the Saudis offered extra production to their Asian clients at 80 cents a barrel higher in prices for the month ahead? Something is going on.
6. Gold is still sliding – and that’s one of the most bullish signals around for stocks. It used to be the case that gold was an inflation trade. But in a world of disinflation in most of the globe, and deflation in some parts of the globe, gold lost its lustre. That saw gold enter a multi-year downtrend with a low earlier this year around $1050.
But as uncertainty, and fear, grew and as the US dollar lost a little ground, gold was able to lift all the way back above $1300. That rally of around 25% got the bulls excited for further gains.
But the reality is that in 2016 at least, gold has morphed from an inflation trade to an uncertainty trade. Which is why the fall back to a low of $1199 overnight is so instructive about where markets might be about to head. Gold’s fall suggests that the Fed’s message has given transparency to traders and as such, reduced uncertainty. So if gold is lower, the Fed might actually be able to pull off a tightening without blowing markets up.
Key data for the past 24 hours (with thanks to BNZ markets)
JP: Retail sales (m/m, %), Apr: 0.0 vs. -0.6 exp.
AU: Inventories (s.a., q/q, %), Q1: 0.4 vs. 0.0 exp.
EZ: Economic confidence, May: 104.7 vs. 104.4 exp.
CA: Raw materials prices (m/m, %), Apr: 0.7 vs. 1.1 exp.
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And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
I featured the Myer chart a few weeks ago and looked at the possibility of it getting to around $1.32. It didn’t make it. The warm autumn has knocked winter clothing sales for six. The stock peaked at $1.265 and has been in a consistent downtrend since.
Even so, this looks like a useful trading pattern for traders to keep an eye on. If Myer reaches support around $1.03 it could be decent value for traders at around 8.5 times earnings. The short winter and long term decline in department stores are headwinds.
However, recent results indicate that management’s turnaround strategy is on track and this should see the stock supported at lower levels.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC