Market Matters Morning Report Friday 15th July 2016

Morning Report 15/07/2016

Market Matters Morning Report Friday 15th July 2016

Morgan bodes well for both Macquarie and the ASX200

Last night the large US bank JP Morgan reported a better than forecasted profit sending the stock up 1.5% and dragging with it Citigroup, up 2.6%, which reports on Friday. JP Morgan is now trading above its BREXIT level which is a stellar performance considering they have ~7% of their workforce on UK soil (16000 employees) and billions of dollars of revenue in flux due to the uncertainty after the surprise vote result - Jamie Dimon was noticeably vocal for the "Remain campaign".

In the US analysts have been downgrading their estimates for company profitability, especially since BREXIT, ahead of this reporting season. Interestingly analysts are excellent reverse indicators for the direction of the market. Significant downgrades, like at present, historically results in companies meeting / beating estimates and overall the market rallying - another good sign for US stocks which should support our local market.

Technically JP Morgan looks excellent targeting fresh all-time highs i.e. over 10% higher.

JP Morgan US Monthly Chart

Macquarie Group (MQG) is very correlated with JP Morgan both in its business mix and exposure to the UK. Last night the Bank of England (BOE) did not cut rates as expected to send the Pound up ~1.6%, this should help both MQG and Henderson (HGG). We have a position in MQG that has been under water since BREXIT but we have remained confident of achieving a profitable result from this purchase.

Looking further at JP Morgan’s result, we saw their corporate and investment Banking businesses up 6% on the prior period while they reiterated FY16 guidance, which is encouraging given recent volatility/uncertainty in global markets. JP Morgan trades on 10.3 times, which is a discount to Macquarie which is on 11.8 times, however, MQG generates a return on equity of ~14%-15%, versus average global peers ROE of 6% - so the PE premium seems justified. Furthermore, based on 2018 numbers, MQG trades on 10.9x versus longer term average PE of 14x – so continues to look cheap.

Technically MQG is not as clear as JP Morgan but we remain comfortable targeting ~$80.

Macquarie Group (MQG) Monthly Chart

US stocks have enjoyed a strong week as expected and are now 1.3% above previous all-time highs. We remain bullish while the S&P is over 2110 targeting ~10% of gains before we commence selling aggressively.

S&P500 Monthly Chart

The ASX200 has surged this week as forecasted in the Weekend Report. I remain important to not fight this rally as it may easily continue higher than many expect.

We remain bullish the ASX200 while over 5275. Targets are hard but ~5600 would not surprise.

ASX200 Weekly Chart

Summary

We remain bullish the ASX200, stay long and enjoy the ride. We also remain comfortable in our MQG position.
For overseas investors, JP Morgan looks to have another +10% upside.

Today we have a large amount of data from China including GDP (6.6% Exp), Retail Sales & Fixed Asset Investment due out at midday – expect some volatility.

Overnight Market Matters Wrap

The Dow has finished in record territory for three days straight and has risen now for five days - the first time since March. The Dow closed up 134 points (+0.7%) at 18,506. The broader S&P500 finished up 11 points (+0.5%) to 2,164.
Oil turned around last night and finished in the positive, after a sizeable hit the evening before. The commentary was based on the thought that yesterday’s +4% loss was excessive and the fact that the UK decided to keep rates on hold, also helped with the sentiment. The commodity finished up 93c (+2.1%) to US$45.68/bbl
Gold fell to a two-week low last night, following the UK’s decision to keep rates on hold. The price closed the session down US$11 (-0.8%) to US$1,332/oz.
Macquarie Group (MQG) is expected to outperform the broader market today, after its relative peer, JP Morgan released its earnings, beating analysts’ expectations on fixed income trading and loan growth.
The September SPI Futures is indicating the ASX 200 to open higher this morning, up 50 points to the 5,440 level.

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 15/07/2016. 9:00AM.

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