Overseas Markets US Market With an hour to go, U.S. stocks fell, sending the Standard & Poors 500 Index below its 200-day moving average, after a rout that wiped $1.5 trillion from shares worldwide last week. Brent crude headed toward a four-year low, while the dollar dropped. Merck & Co., Johnson & Johnson and Halliburton Co. paced losses in health-care and energy stocks that led the market lower earlier. CSX Corp. jumped 7.8 percent after the railroad operator spurned a merger proposal by Canadian Pacific Railway Ltd., according to people familiar with the matter. Norfolk Southern Corp. and Kansas City Southern also climbed. Investors are also watching earnings reports after Alcoa Inc. unofficially kicked off the U.S. reporting season last week. JPMorgan Chase & Co., Citigroup Inc., BlackRock Inc. and Google Inc. are among S&P 500 members posting results this week. Profit for companies in the index probably rose 4.8 percent and sales gained 4.2 percent in the third quarter, analysts projected. The Chicago Board Options Exchange Volatility Index rose 1.6 percent today to 21.58. The measure, known as the VIX, surged 46 percent last week for the biggest rally in more than four years. European Markets European stocks were little changed, after concern that the global economic recovery is faltering sent the Stoxx Europe 600 Index for its biggest weekly decline since May 2012. U.K. stocks advanced for the first time in five days, rebounding from earlier losses, as faster- than-estimated trade growth in China outweighed concern policy makers are divided on steps to revive the euro-area economy. Randgold Resources Ltd. and Anglo American Plc gained at least 4.4 percent each, pushing a gauge of London-listed mining companies higher. ARM Holdings Plc tumbled to the lowest price since July 2013 amid a bearish outlook for semiconductors makers after Microchip Technology Inc. last week warned of an industry correction. Tesco Plc fell 2.5 percent after Cantor Fitzgerald & Co. said the grocers audit of commercial teams may reveal more problems. As investors become more sceptical, pulling a record $1 billion from an exchange-traded fund tracking European equities, the latest European Central Bank strategy is also failing to convince economists. More than 60 percent of respondents in a Bloomberg monthly survey say the plan to steer the ECBs balance sheet toward early-2012 levels is set to fall short, and a growing number predict President Mario Draghi will resort to large-scale government-bond buying. Some officials are already opposing the plan to buy asset- backed securities and covered bonds. IMF meetings in Washington this weekend showed differing opinions over how much more stimulus the euro-area economy needs from the European Central Bank. While Draghi repeated hes ready to expand the central banks balance sheet by as much as 1 trillion euros ($1.3 trillion), Bundesbank head Jens Weidmann said a target value isnt set in stone. Asian Markets Asian stocks extended a decline in global equities amid concern that the Federal Reserves pledges to keep record-low interest rates for longer wont counter a global slowdown. Agile Property Holdings Ltd. plunged 17 percent in Hong Kong as suspension of its shares was lifted after the Chinese developer said its chairman had been confined by order of prosecutors. China Taiping Insurance Holdings Co. dropped 9.6 percent after announcing a rights offer. ASX Ltd. dropped 1.2 percent after equity and bond futures trading on Australias main exchange was halted due to a technical issue. Chinas stocks fell for a second day as declines for oil and consumer-staples companies overshadowed data showing exports rose more than estimated. Inner Mongolia Yili Industrial Group Co. slid 6.3 percent. China Petroleum & Chemical Corp., the biggest refiner, retreated 1.5 percent after Brent futures extended their slump to the lowest in almost four years. Stocks came off their lows as coal producers rallied after the price of the fuel in Qinhuangdao Port advanced for a second week. In Hong Kong, a third week of rallies tried the patience of truck and cab drivers. A line of cabs and trucks drove right up to some barricades earlier this afternoon, with banners on their hoods saying Enough is Enough. Scuffles broke out with police and some men, who were wearing face masks, were detained. The pro-democracy protests have polarized the city, with thousands of people rallying for free elections, while earning the ire of retailers and drivers. Hong Kong Chief Executive Leung Chun-ying said yesterday that there is almost zero chance China will change its decision to vet candidates in the citys leadership contest in 2017. Ideas Credit Suisse examine recent economic data on global growth. This has been a primary catalyst for the fall in equity markets over the last six weeks and is worth analysing to the extent it may provide some sign posts on potential further QE and around global interest rates moves. CS examine the Asian slowdown, the risks in Europe, and the peculiar collapse of volatility in the US. The five years since mid-2009 has very nearly been the least volatile period for IP growth in US history. CS found that global industrial production growth has been slowing for almost a year. The summertime recovery CS expected did not happen due to a surprisingly broad slowdown in Asian growth and a distinct weakening of economic confidence in Europe. The key points CS draw are: • The local performances of manufacturing in each region this year do not resemble each other. Japan has hit a major negative shock, China and many emerging economies are sluggish, animal spirits in Europe have become depressed amid a deteriorating export environment, and US growth continues to hum along. The diversity of the regional performances means no region has tracked global growth closely. Global IP momentum has slumped since late last year, and CS expect it to charge higher at the end of this year. • Global IP Momentum is set to hit an August trough, as expected, but the bottoming-out process is turning out to be much more protracted - more U than V. Global IP Momentum should hover around 1% from August to October with a real improvement now only setting in late into Q4. • Following intense H1 volatility, global goods demand has resumed growth, led by a strong US and resilient euro area as Japanese demand is stabilising after its post-VAT slump. Inventories are lean (outside Japan) and pose no obstacle to production near term. Demand is key for the global outlook. • The pessimism in Europe about future exports might lead to a sharp slowdown in investment, causing what has been an external shock to turn domestic. Still, that dynamic could play out over a long period, and does not preclude a momentum rebound from happening now. • CS earlier expectation of rising 5y5y rates driven by improving global growth did not play out as very weak summertime Asian growth revealed itself. But current low yield amidst an extended slowdown further supports the notion that they are related. CS do still expect a growth rebound to put upward pressure in yields. • The sharp EM Equity sell-off has caused equity-only risk appetite to slump. Weaker equities and the re-really in G3 bonds have also caused Global risk appetite to drop back to a six-month low. Duration risk appetite hit euphoria (reading above +5) at the end of August and sharply reversed lower but has now stabilized around +3, somewhat above its longer-term average. CS have pushed back its forecast of rising global industrial production growth to the end of the year following recent downside surprises in Asia and Germany. To put the importance of this pan-Asian slowdown in perspective, Asia is 44% of global IP on a nominal value-added basis, and Asias average IP growth over the past ten years has been 7.7% p.a., more than double the rest of the world. No wonder long-term interest rates in developed markets and commodity prices have been trending lower. Although Japans VAT increase and related sharp declines in local production were impactful, they are not the whole story. Chinese growth data improved for a few months after March, but clearly slowed in the summer, according to a wide range of indicators. Data have also been soft across Asias other economies, including Korea. Despite widespread despair over Europes economic performance, its final demand data - especially for consumption - has held up well, with auto sales and retail sales continuing to trend higher in real terms. Exports - including to Asia - have also held up. CS still think IP momentum is set to rebound, but evidence of acceleration is not yet visible. The global profile continues to be distinctly unlike the performance of the major regions, which have also been very uncorrelated to each other. The clear risk is that a deterioration in export expectations in Europe leads firms to cut investment sharply. There are hints of this already, but CS think European and global goods demand growth is sufficiently strong to underpin an imminent rebound in production. Incidentally, yesterday, Federal Reserve Vice Chairman Stanley Fischer said weaker-than-expected global growth could prompt the U.S. central bank to slow the pace of eventual interest-rate increases. If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise, Fischer said in speech yesterday in Washington. Fischer, 70, said the Fed wont raise rates until the U.S. expansion has advanced far enough, and most emerging markets should be able to weather the increase. Fischers remarks highlight growing concern among U.S. central bank officials about the impact of a global slowdown and a strengthening dollar. He spoke to central bankers and finance ministers gathered in Washington for the annual meetings of the World Bank and International Monetary Fund. From a market perspective, these big differences between regional performances and outlooks have loomed large. CS continue to believe that longer-term US and European interest rates are largely driven by conditions in the global goods sector, and so rates may rise if CS proposed momentum rebound occurs. On the other hand, CS do expect the recent shocks in global manufacturing to meaningfully impact the outlook for US monetary policy. Rates are likely to remain lower for longer and this may continue to support the yield trade and underpin demand for risk assets. Research Leighton Holdings In Morgan Stanleys Tactical Idea research, they believe the share price of Leighton Holdings will fall in absolute terms over the next 30 days. China has moved to install a range of coal import tariffs effective October 15. With export demand now potentially constrained, the economics of some Australian mines may deteriorate. A Morgan Stanley analysis of cost metrics where LEI is the incumbent contract miner suggest a number of customers may be incentivized to cut production. Morgan Stanley estimate that there is about an 80%+ or highly likely probability for the scenario. Newcrest Deutsche Bank reported that last week it visited the Lihir Operation in PNG. Lihir is NCMs highest cost asset and is also their most complex and contentious, aspects that are unlikely to change in the near term. Whilst there was some discussion that has led DB better understand the various layers of complexity in the operation, little detail was disclosed to allow DB to form a view around the capability of the asset beyond FY15. No discussion on the past, very little reference for the future The only target NCM discussed was its desire to achieve 12Mtpa through the comminuition circuit (up from 10Mtpa). This run rate is being targeted by the end of the year, with a plan to stabilize at these levels before assessing further options. Throughput improvement has the potential to drive unit costs down. Unit cost reduction relies on productivity gains rather than cost cutting Discussions on costs & capex were off limits, although we know the average mining cost is currently US$5/t (ore, waste, stockpile reclaim). Costs obviously need to reduce, however translating operational & productivity improvements into a quantifiable cost reduction is not possible. No details of the stockpiles metallurgical characteristics were disclosed, making it difficult to determine the blending potential of these stockpiles with ex-pit ore and therefore how long this feed could last before needing to open up another stage of the open pit. It appears NCM is proposing to blend c.40Mt on the Kapit Flat & Minifie stockpiles with c.36Mt from the Minifie Phase 9 cutback to potentially satisfy medium term mill feed. If this occurs, Kapit may not be needed for a number of years, but the overlying stockpile would be mostly removed. DB rates NCM as a sell. Asaleo Healthcare Macqaurie attended a site tour of Asaleos Kawerau, Springvale and Box Hill manufacturing facilities. Key points were: 1) Business Transformation program making good progress; 2) Company is on track to deliver cost savings; 3) Capital management a key focus in CY15. With capex sunk and no tax payable in Australia until at least 2016, Macquarie estimate Asaleo will generate ~$50m of free cash after dividends to apply to debt reduction or capital management; and 4) A weaker A$ will provide an industry wide headwind in CY15. Asaleos Personal Care and Professional Hygiene divisions ranges are mainly sourced in ??? or locally manufactured, which while still facing headwinds, are likely to be at a competitive advantage to competitors which mainly import in US$. Macquarie estimate ~$3m gross margin headwind in CY15 assuming no price recovery. Overall Macquarie like the Asaleo business, however with currency headwinds and already strong post IPO performance upside is limited.
Posted on: Tue, 14 Oct 2014 00:53:42 +0000
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