Afternoon Report / Noflation should lead to imminent rate cut (BAL, HLS, EHL, CGC)

By Market Matters 24 April 19

Noflation should lead to imminent rate cut (BAL, HLS, EHL, CGC)

Market Matters Afternoon Report 24th April 2019

WHAT MATTERED TODAY
Another really strong day for Aussie stocks as traders position for further interest rate cuts locally following a weaker than expected print on inflation at 11.30am this morning…A host of investment banks along with ANZ, WBC and NAB are now calling for two rate cuts this year, the first one coming as soon as May. Here’s what ANZ said which is similar to our comments in today’s income note "The downward surprise to core inflation in the first quarter leaves the RBA will little choice but to cut the cash rate by 25 basis points at its May meeting, with another 25 basis points likely to follow in August."

Economic Data Today

Rates going lower is certainly bullish for equities particularly in Australia if other central banks globally hold tight. The Aussie Dollar hit hard today on the back of the inflation data, and rightly so however ultimately it’s just still at the base of its trading range.

AUD/USD Chart

At a sector level today, Healthcare bounced strongly from yesterday’s sell off while the recently HOT material stocks have started to lag. Money also flowing back into the banking space even though lower rates theoretically puts pressure on margins, traders focussing more on the impact of lower rates on property prices and thus bad debts. While a rate cut of 0.50% taking rates from 1.5% to 1% doesn’t seem big economically, it can create a big shift from a sentiment perspective + it essentially helps banks lend more – a positive for property prices, a positive for loan growth, and ultimately a positive for earnings.

Overall today, the ASX 200 added +62 points or +0.99% at 6382. Dow Futures are trading down, -16pts / 0.06%

ASX 200 Chart

ASX 200 Chart

CATCHING OUR EYE;

The bullish market – As we’ve said a few times of late, we can’t argue with the tape (i.e. the market) and stocks are clearly rising. From the December 24 low of 5410 on the ASX 200, the market has rallied +973 points or +18% to todays close. If the genesis for the market decline in December was rates going up too hard too fast given the faltering strength of the global economy, the opposite is now true for the recent rally in stocks with the market now firmly expecting rate cuts here is Australia. The net / net impact has been fairly neutral given the market peaked in August 2018 at 6354 and today it closed at 6368, however the volatility under the hood has been significant.

Stocks we hold catching my eye today…Some decent looking charts starting to emerge in the market, particularly some of the beaten down areas that we’ve targeted in the MM Platinum Portfolio. Healthcare stocks Healius (HLS) +3.45% threatening to breakout above the $3.00 handle, Costa (CGC) +2.08% needs to push through the $5.50 handle for it to look good while Emeco (EHL) +3.59% is starting to move as well. Just as we’ve seen in the resources in the last 48 hours or so, money is transitioning from strength into weakness with the index benefitting most from buying in the influential banks.

Healius (HLS) Chart

Bellamy’s (BAL), +15.59%, This is a stock we’ve looked at recently from a short term trading perspective and its now firmly on the radar after adding +15% today. The company said it had received regulatory approval from China’s State Administration for Market Regulation (SAMR) overnight in relation to branded products out of the ViPlus Dairy Toora facility in Victoria. The products themselves have now been approved, however the company is still awaiting SAMR approval for the artwork to be used so it is not yet in a position to begin production.

Importantly, and this is where the risk lies, Bellamy’s is also awaiting separate SAMR approval for the organic products it wishes to manufacture from Camperdown in Sydney. These would be considered super premium products vs. the premium products out of Toora. So this initial approval does show signs that the Chinese regulators are willing to work with Bellamy’s justifying its strategy to push into the region, however the Camperdown issue still out there.

Bellamy’s (BAL) Chart

Broker Moves: Kogan (KGN) -3.58% has had a great run of late rallying from ~$3 to above $5 however the higher it goes, the more likely Ruslan and Co will sell stock. He’s still holding 24.5m shares and is a known seller + David shafer also looking to cash some in – he holds ~9.5m shares. UBS downgraded today hence the weakness. 

Alumina (AWC) -2.54% hit on the Shaw downgrade from Peter Connor, I’ll interview him next week about his updated views (aiming for Thursday) while Bells upgraded Praemium (PPS). PPS in the smaller space is actually starting to get interesting after falling from ~$1.15 to sub 50c – value emerging.

Alumina (AWC) Chart

• Kogan Downgraded to Neutral at UBS; PT A$5.80 

• Alumina Downgraded to Sell at Shaw and Partners; PT A$2.30
• Saracen Mineral Raised to Accumulate at Hartleys Ltd; PT A$2.87
• Praemium Upgraded to Buy at Bell Potter; PT A$0.62

OUR CALLS

We trimmed Telstra (TLS) today from the Platinum Portfolio for a profit

Have a great night

James & the Market Matters Team

 

Disclosure

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