Market Matters Afternoon Report Wednesday 27th July 2016

Afternoon Report 27/07/2016

Market Matters Afternoon Report Wednesday 27th July 2016

Good Afternoon everyone

Market Data

What Mattered Today

A strong open this morning – probably stronger than most thought with the index up +25pts or so ahead of the inflation print at 11.30am. A range of +/-34pts. 5530 low, 5564 high and a close at 5539; up +2pts or +0.04%.

Regarding inflation, we saw 0.4% printed qoq and 1% yoy which was in line with expectations and leaves the door ajar for an August rate cut – although less so than was priced in before the data dropped. The Aussie dollar was initially higher before it tracked lower into the afternoon. Lower rates are positive for equities. However, you’ve got to question whether or not a change from 1.75% to 1.50% will have any bearing on economic performance – more to do with sentiment one would think but still highly questionable. 55% chance for an August cut now priced in v 66% yesterday.

Still, the main takeout for us is inflation remains low, although a long way up from last quarter’s -0.2% print which had the RBA trigger happy.

Fortescue Metals (FMG) put out production numbers today, and the market liked it – bidding the stock up +7.04% to close at $4.41. We mentioned yesterday that FMG should go higher before an ABC style correction back into the high 3’s. We think that is a likely scenario.

On the numbers today there were a couple of great aspects. Costs were good, and FMG continues to grind costs down, hitting $14.31 in 4Q16 – although the number was a miss on their target of $12.51 (to meet FY16 guidance of $15/t). It’s a good number and sets them up well for future periods + they are holding their own v the BIG 3 of Rio, Vale, and BHP. To give some context here, FMG has lowered C1 costs by 35% qoq and 43% yoy – which is massive!!

Guidance for 2017 was also good with; Shipments 165-170Mt; C1 cost $12-13/wmt; Sustaining capital expenditure of $2.00/wmt; We think they’ll find it hard to get costs that low.

…and finally, deleveraging continues to happen with Free Cash Flow piling up at a rate of ~US$2bn pa over the past two-quarters. This has enabled debt reduction of ~$2.9bn during FY16 – current Net debt sits at US$5.2bn. In short, FMG could be debt free in 2-3 years. Importantly, FMG has a clear pathway to debt retirement even at recent iron ore price “lows ($38/t) deleveraging would “only” take 4-5 years.

So – another decent QTR for FMG although a lot now in the price. We’ll be likely buyers when FMG has a 3 in front of it…..

Fortescue Metals (FMG) Daily Chart

Graincorp (GNC) – a stock we sold recently from the MM portfolio dropped hard today – down -5.67% to close at $8.15 after their largest shareholder Archer Daniels Midland tried to sell its 19.9% stake in the company to institutions however failed to get interest at a high enough price - we hear it was something around the $8 mark.

It’s a tricky deal given the ADM launched a takeover for GNC back in November 2013 which was blocked by the then Abbott Govt. It was thought that Turnbull might be more receptive to the deal, however, now ADM have shown their hand, whatever takeover premium that was sitting in GNC has probably evaporated. Glad we exited.

GrainCorp (GNC) Daily Chart

Sectors

Source; Bloomberg

ASX 200 Movers

Reporting this week

Aussie reporting is starting to kick into gear and will now become the topic of many afternoon missives…..We’re conscious of Henderson Group (HGG) tomorrow while Macquarie (MQG) hold their AGM. Origin (ORG) has June QTR production on the 29th July.

NPAT = net profit after tax (consensus numbers)
EPS = earnings per share (consensus numbers)
DPS = dividend per share (consensus numbers)

Today, FMG beat and Independence Group (IGO) production numbers were overshadowed by a cap raising (we still like that stock).

Select Economic Data; Stuff that really Matters in Green

Aussie inflation (CPI) now out of the way – focus will turn to the US tonight for the FOMC meeting wrap-up, and more importantly (probably) will be Japanese central bank activity on Friday. Some BIG numbers being pushed around the market at the moment.

What Matters Overseas

….Still looking for one more HIGH for the S&P 500

US S&P500 Monthly Chart

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 27/07/2016. 5:00PM.

Reports and other documents published on this website and email (‘Reports’) are authored by Market Matters and the reports represent the views of Market Matters. The Market Matters Report is based on technical analysis of companies, commodities and the market in general. Technical analysis focuses on interpreting charts and other data to determine what the market sentiment about a particular financial product is, or will be. Unlike fundamental analysis, it does not involve a detailed review of the company’s financial position.

The Reports contain general, as opposed to personal, advice. That means they are prepared for multiple distributions without consideration of your investment objectives, financial situation and needs (‘Personal Circumstances’). Accordingly, any advice given is not a recommendation that a particular course of action is suitable for you and the advice is therefore not to be acted on as investment advice. You must assess whether or not any advice is appropriate for your Personal Circumstances before making any investment decisions. You can either make this assessment yourself or if you require a personal recommendation, you can seek the assistance of a financial adviser. Market Matters or its author(s) accepts no responsibility for any losses or damages resulting from decisions made from or because of information within this publication. Investing and trading in financial products are always risky, so you should do your own research before buying or selling a financial product.

The Reports are published by Market Matters in good faith based on the facts known to it at the time of their preparation and do not purport to contain all relevant information with respect to the financial products to which they relate. Although the Reports are based on information obtained from sources believed to be reliable, Market Matters does not make any representation or warranty that they are accurate, complete or up to date and Market Matters accepts no obligation to correct or update the information or opinions in the Reports.

If you rely on a Report, you do so at your own risk. Any projections are estimates only and may not be realised in the future. Except to the extent that liability under any law cannot be excluded, Market Matters disclaims liability for all loss or damage arising as a result of any opinion, advice, recommendation, representation or information expressly or impliedly published in or in relation to this report notwithstanding any error or omission including negligence.

To unsubscribe. Click Here