Australian Investment Blog

Good Afternoon everyone

Market Data

What Mattered Today

A BIG Tuesday followed by a very fickle Wednesday….up +110pts yesterday only to give back -82pts of it today as the resource stocks got smacked….BHP down -9.36% to $18.79b – its worst day in more than seven years….RIOoff -7.54% to close at $47.85. Combined, RIO and BHP took a massive -25pts off the index.

A decent pullback in commodity prices overnight could explain a portion of the fall, as could a weaker than expected PMI number from China yesterday + throw in an announcement by Brazilian prosecutors of a $58 billion civil lawsuit stemming from the Samarco dam disaster and we end up seeing the material sector get HIT by -5.91%. BIG sell orders kept hitting the stock whenever it came up for air. The Aussie Dollar wouldn’t have helped – off from an early high of US76.50c to be currently testing the US75c handle. $$$ coming back out of Oz post the interest rate cut one would presume.

We’ve touched on a few of the other trends recently in Morning Notes & Trading Alerts, largely around the seasonality of the $US, and the potential for a pullback in commodities. The $US is generally pretty strong during May, at a time when equity markets are typically pretty weak. We also thought the conditions that prompted the commodity rally wouldn’t repeat, that being $US weakness, strong economic growth numbers from China and weak quarterly production in Iron Ore from the majority of global players.

That would lead to a retracement in resource stocks, and as money looked for a home, outperformance of the banking space which had already experienced a long period of selling. This remains our shorter term view and it’s starting to play out. Days like this shows just how HOT money is in the resource names.

Overall though, we do remain positive the resource sector from a trading perspective and we’ll be looking for opportunities into this most recent pullback…We’ve just got to be fairly nimble and be comfortable selling into strength when/if it prevails.

There weren’t too many green spots on the bourse today – other than the usual suspects that like a soggy market in CSL – which added +1.75% and Healthscope (HSO) which closed at $2.80 today – up +1.08% on the session.

QBE is a stock on our radar – and it rallied +2.32% today to close at $11.46 on the back of their AGM. They do have an investor day next week (Tuesday 10th May) where we’ll get more colour, however they did reaffirm guidance – which is good. A few swings and roundabouts however Gross Written Premiums up 3% on pcp, negative mark to market of $130m from interest rate movements, investment returns expected to be 2.4% (which is a function of low bond yields) and the outlook to remain challenging for the rest of 2016.

QBE is clearly a turnaround story and if they can improve ROE – or at least set a reasonable path to get back to double digit ROE then the stock will start to get re-rated…Looks good technically. We hold Suncorp (SUN) in the MM portfolio so it’s hard to justify two insurance stocks although we are watching…QBE trades on a PE of 12.7 times FY17 v Suncorp on 13 times, IAG on 16.1 times, Steadfast on 16.5 times and Medibank on 20.7 times. It’s cheap – it just needs some less bad news.

Stocks & Sectors Today
Source; Bloomberg

ASX 200 Movers

***What Matters Tonight***

European leads are weakish with the FUTURES on the FTSE -27, DAX -8 & CAC +4
In the US DOW FUTURES are off -4pts and the S&P 500 FUTURES are off -1


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

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