Golds rally, Fortescue hit by broker downgrade (FMG)
WHAT MATTERED TODAY
A reasonable season overall from the market today recouping some of yesterday’s declines with some corporate activity to boot – Vicinity (VCX) selling ~$630m assets to SCA Property (SCA) and SCA subsequently raising capital provided some interest and we covered that in the Income Report today – click here
Gold stocks were strong on the back of a rise in the precious metal overnight – it traded back up above US$1200/oz which makes sense following recent trends around wage growth in the US, inflation and growing uncertainty globally. Gold has struggled in recent times, thanks largely to strength in the US currency, and as we suggested this AM – click here, that has become a crowded trade. Gold trades inversely to the $US so by definition, the crowded long US Dollar trade would imply the market is short Gold and therefore gold is susceptible to a move on the upside if / when the US dollar pulls back.
While gold was strong today, we think one more spike in the $US currency is needed to provide better risk / reward into the Gold stocks. Today we saw Northern Star (NST) add +4.43% while Newcrest (NCM) put on +3.30%...Gold stocks are now worth putting on the radar.
Elsewhere, Morgan Stanley initiated on Fortescue Metals (FMG) and had a negative view, the stock lost -4.12% as a result while A2 Milk (A2M) suffered at the hands of further Director selling – this time it was Independent Non-Exec Director Peter Hinton who offloaded NZ$300k worth of stock. Sometimes a stock just doesn’t feel right and at the moment, A2 certainly fits that bill.
Overall, the index was reasonable with the ASX200 adding +20 points or +0.32% today to 6146. Dow Futures are currently trading up +58pts /+0.22%
ASX 200 Chart
ASX 200 Chart
CATCHING OUR EYE
Broker Moves; Shaw was out again pushing the bearish thesis on AMP although the stock is remaining somewhat resilient (sort of) above $3 for now. We think that won’t last and in the not too distant future AMP will have a 2 handle on it. Laf over at Bells upgraded IOOF (IFL) from a completely negative view to a less negative view. He’s called that stock well and has some decent following in that area of the market – IFL was up +2.93% as a result to $8.07 and although in the short term we could see a relief rally, the longer term picture for this business remains poor following the purchase of ANZ’s Wealth business right before the Royal Commission was unleashed.
RATINGS CHANGES:
· Fortescue New Underweight at Morgan Stanley; PT A$3.30
· CYBG Assumed at UBS With Sell; PT 3.11 Pounds
· IOOF Holdings Upgraded to Hold at Bell Potter; PT A$7.70
· SCA Property Upgraded to Overweight at JPMorgan; PT A$2.65
· Mirvac Group Upgraded to Hold at Morningstar
· Sanford Downgraded to Neutral at Forsyth Barr; PT Set to NZ$8.30
Fortescue (FMG) $3.72 / -4.12%; the iron ore miner took a hit today following the release of Morgan Stanley’s (MS) deep dive into the business and the iron ore market. MS initiated coverage on the stock with the equivalent of a sell and a price target that was ~16% below yesterday’s close. The investment bank cites the discount being applied to Fortescue’s lower grade ore as the biggest headwind to the company’s earnings. Chinese steel mill margins remain high and MS expect this to continue as outdated mills slowly go offline, leading to the blow out of the discount for Fortescue’s 58% fe product vs the standard 62% index which peaked at over 40% resulting in FMG missing out on the recent ~20% rise in iron ore price rally.
Fortescue have stated in the past that they believe this large discount is a cyclical event and demand for their product will return helping to support earnings, although this is the company talking its own book. They recently announced a launch of a higher quality blended product which will go some way to lift the company’s realized price, although this will only be a small portion of the company’s sold product.
Fortescue FMG) Chart
OUR CALLS
No trades across the MM Portfolios today.
Have a great night
James / Harry & the Market Matters Team
Disclosure
Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.
Disclaimer
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