Market Matters Afternoon Report Tuesday 21st June 2016

Afternoon Report 21/06/2016

Market Matters Afternoon Report Tuesday 21st June 2016

Good Afternoon everyone

Market Data

What Mattered Today

A fairly slow day today with the market consolidating from yesterday’s +94pt gain as the BREXIT trade has started to unwind somewhat. We’ve discussed in recent notes at length so we won’t re-hash again, however, the REMAIN camp is well ahead and the market is now factoring in a more favourable outcome. Because of that, risk has increased around the vote given the markets positioning has changed.

It might sound counter-intuitive however when the market is hedged, the chance of volatility is lower even though the perceived risk – often stemming from the media – is higher.

Anyway, the market didn’t move much in aggregate today, however, opened higher, challenged the 5300 level then pulled back into the close. A range of +/-38pts. 5252 low, 5290 high and a close at 5274; up +17pts or +0.33%.

Resources are always a talking point as they’re a large chunk of our market. Less so than in years gone by however meaningful nonetheless. We put in a chart a few weeks ago of the EPS profile of the Aussie market, with signs that earnings expectations are bottoming. Here it is again courtesy of Shaw and Partners…

The main catalyst for the markets changing EPS profile has been earnings revisions towards the miners. We know brokers are typically late to the party to revise forecasts, and they’re generally pushed into it by rallies in share prices, however, we are seeing the early signs of an upgrade cycle starting amongst analysts.

Make no mistake, they weren’t upgrading at the lows, it took some share price appreciation for the revisions to start. Now, though, are brokers/analysts – and even Market Matters too pessimistic on the miners?

The answer is…it depends on – which is the sort of non-committal answer we detest at Market Matters. We think miners go lower first then we’ll look at them again – and probably add them back into the portfolio.

However, if we put in spot prices for both commodities and currencies most miners are due an upgrade. Spot prices refer to current market prices v using forecast prices – so, it suggests analysts see lower commodity prices playing out first, which we agree with.

We’re bearish Copper as we’ve been for a long time, we see lower prices for Iron Ore after calling the recent bounce, bullish Gold longer term but cautious near term after the recent rally, yet we still think Oil has further to run on the upside.

Here is how 2016 earnings per share expectations would change if we use spot prices according to UBS. Of note, BHP is +40% higher, RIO is +60% higher in 2016…FMG is slightly higher in 2016 however their 2017 EPS takes a massive leap over and above current forecasts if we use spot out that far.

Although this is not realistic, as commodity prices won’t remain static, it does highlight how leveraged our miners are to continued strength in Commodity prices and the big share price rallies that are likely to occur at some stage in the next few years. At MM, we are very conscious of this, and will guide our portfolio accordingly – when we believe the time is right.

Sectors Today

Source; Bloomberg

ASX 200 Movers

Top 20 shorts

As we know – Metcash (MTS) reported FY16 earnings yesterday and the stock was off sharply. A slight rebound today (+4.04%) to $1.93, however, it continues to be a stock we don’t like…Some brokers do and it clearly divides opinion. Shorts have started to re-load in MTS in the last few days – and are now 13.52% of the issued capital.

Broker Calls on Metcash (MTS) – a lot of divergence

Source; Bloomberg

What Matters Overseas

We’ve updated our overseas markets screen based on feedback from Subscribers. The below looks at FUTURES prices only. U.S markets are poised for a higher open – not so the case in Europe.

S&P500 traded well off the session highs overnight….

Regards,

The Market Matters Team
Level 12 28-34 O'Connell St
Sydney, NSW 2000.

All figures contained from sources believed to be accurate. Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy. Prices as at 21/06/2016. 9:00AM.

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