Market Matters Afternoon Report Tuesday 31st May 2016

Afternoon Report 31/05/2016

Market Matters Afternoon Report Tuesday 31st May 2016

Good Afternoon everyone

Market Data

What Mattered Today

Fairly volatile session today to end the month with a decent intra session range of +/-41pts. 5365 low, 5406 high and a close at 5376; down -29pts or -0.54% on a late sell off.

The MSCI index rebalance will take effect as at close of trade today so some volatilty associated with that. The main amendments impacting Aussie stocks being…

Domino’s Pizza (DMP) – Addition / 2.5m shares buying / +7.8 days volume
Iluka (ILU) – Deletion / -17m shares selling /- 3.7days volume
TPG Telecom (TPM) – Upweight / +1.7m shares buying / +1.5days volume
Asciano (AIO) – Downweight / -2m shares selling /-1.1 days volume

On the economic front, loan growth figures were interesting. Business credit is now growing faster than housing – which hasn’t been the case in recent times. That’s a positive for the business banks such as NAB although not enough to push it into the greeen today…off -0.37% to $27.15. Across the board Australian banking system loan growth for the year to April was 6.7% with housing 7.0% & business lending 7.4%. For all the talk of a credit bubble, we’re not actually seeing it in the longer term trends/figures as per below which goes back to 1978

We also had a decent print on Aussie exports today, which should bode well for GDP data (+0.6% qoq expected) which is out tomorrow (11.30am). The Aussie dollar rallied on the back of both numbers and was up more than 0.5c on the session.

We’ve had a few questions/comments of late about infrastructure stocks…Transurban (TCL) and Sydney Airports (SYD) etc. Quality stocks but as always, the price is a major factor in deciding whether or not to buy them. We made some comments this morning about interest rates, and their likely direction. Down first but then up and up probably further than down over the next 18-24 months or so.

That’s important when considering stocks that have run hard on the back of low interest rates. The Q needs to be posed – what amount of share price appreciation is a result of earnings growth, and what is a function of a very low cost of capital?

Earnings have risen for both companies over the past five years, which is good, yet the share price has risen a lot more. Makes sense to think if rates start to track higher, which seems very plausible then some of the share price appreciation based on the decline in cash rates will reverse and the stocks with go from a period of outperformance to underperformance.

Looking at SYD today, good eco data reduces the chance for more interest rate cuts locally hence the stock gets sold. It’s very susceptible to changes of rates to say the least

Virgin (VAH) was higher today – adding +7.14% to 30c after announcing a deal with China’s biggest airline group – HNA. The deal will give VAH cash – about $150m worth via a placement of stock (13% of the company) now with plans for 19.9% over time. The placement is at 30cps – about a 7% premium to Mondays close – hence the closing price today. They’ll also given VAH access to new planes + Chinese routes, lounge sharing etc. It comes at a time when Air NZ is trying to sell their 26% stake in VAH and the deal will dilute their holding down to 22%. VAH has been struggling with too much debt, and not enough capital to keep pace with Qantas (QAN). This is a good move however still too much uncertainty for us…

Stocks & Sectors Today

Source; Bloomberg

ASX 200 Movers

What Matters Tonight

U.S + U.K markets are back online tonight and at this stage, futures are suggesting a flat/higher open for both regions. The main focus for the week will be on Friday with U.S non-farm payrolls to be announced. +158k jobs being the consensus number and the unemployment rate to be 4.9%.

If it’s inline or better we’ll see a firming of expectations for a June rate hike. Last night saw St. Louis Federal Reserve President James Bullard say…."My sense is that markets are well-prepared for a possible rate increase globally, and that this is not too surprising given our liftoff from December and the policy of the committee which has been to try to normalize rates slowly and gradually over time."

This is typical of Fed spin which has kicked up a few gears in the last week or so as they look to rejig market expectations. The Fed is very conscious of market positioning and a few weeks ago, mkt pricing suggested only a 5% chance for a June hike. That level is now at around 25%. Interestingly, the market thus far has taken the change of this positioning well. It would seem, that U.S rate hikes are now being digested and the mkt remains comfortable.
The other interesting point is the direction of the $US. As subscribers now, we had been looking for a bounce in the $US from the 91.00 region on the dollar index and that kept us cautious on commodities and commodity stocks after they had a very good bounce in January – which we enjoyed much of. Yesterday, we dipped out toe back into the sector with Regis Resources (RRL) on the expectation that Gold/other commodities may start to see some support on short term weakness/consolidation of the $US.

Whatever the case, US rates are the main game in town at the moment and more clarity will be given via the employment situation on Friday (specific emphasis should be on wage growth).

In China – look for manufacturing data tomorrow. 11am sees the official PMI and 11.45am sees the Caixin PMI.

Global FUTURES Markets

Source; http://www.cnbc.com/world-markets-heat-map/

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 31/05/2016. 4:00PM.

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