Afternoon Report / RBA cuts rates to historical lows – more to come

By Market Matters 01 October 19

RBA cuts rates to historical lows – more to come

Market Matters Afternoon Report 1st October 2019

WHAT MATTERED TODAY

An interesting session locally with the RBA front and centre cutting rates as expected to 0.75% at 2.30pm this afternoon, the lowest level in history and enough to spur a sell-off in the currency and a rally in equities. Yesterday afternoon we saw a sell-off late in the day, end of month / end of quarter book squaring saw the index trade -50pts from the session highs while today we saw the opposite play out, the index rallied +50pts from the lows as the Aussie Dollar tested the 67c handle.

Australian Dollar Intra-Day

Rate cuts are clearly bullish for asset prices as this longer term chart implies, the white line showing benchmark interest rates while the orange line looks at the ASX 200.

RBA Cash Rate versus ASX 200

Also important today was the statement attached to the cut and this was as per programmed, with another 0.25% reduction likely, taking benchmark rates to just 0.50%. Hard to comprehend but here we are and from the tone of the statement, its seems the lower for longer call has merit.

Somewhat justifying today’s cut we also saw weaker than expected building approvals down -1.1% MoM versus +2% expected while the annual pace of decline (-21.5%) is clearly a concern. So although property prices in Sydney and Melbourne have picked up, a theme the RBA covered, price increases are certainly not yet flowing through to improved construction activity.  

Local Data Today

Source: Bloomberg

Overall, the ASX 200 added  +54pts today or +0.81% to 6742, Dow Futures are trading up +113pts/+0.42%.

ASX 200 Chart

ASX 200 Chart

CATCHING MY EYE; 

STOCKS MOVING: we saw some big moves on the stock front today and the theme we’ve touched on lately between high growth and cyclical value once again becoming obvious. While some growth names were strong, it’s the more traditional names like CAR, CSL, DHG, REA that have attracted buying over and above some of the newer growth stocks like Appen & Afterpay along with the platform providers like Netweath (NWL) and HUB. We’re also seeing some money flow back into beaten up value, Costa (CGC) an example yesterday while Pact Group (PGH) attracted buying today adding +9% from a low base.

Pact Group (PGH)  Chart

CORPORATE ACTIVITY: A few stocks were on the bid & raise train today. The first, AMA group looking to take out Suncorp’s Smash Repairs business for $420m, with around half of the cost funded by tapping shareholders. There are a number of synergies between the two car repair businesses and further cements the relationship. New shares have been offered at a 5% discount to last close and the deal is expected to be EPS accretive in the first year.

Kathmandu (KMD)  has also dipped into shareholder pockets in search of money to fund a takeover bid at privately owned surf wear company Rip Curl for $350m. the rational is to balance earnings for the company which currently receives the bulk of sales heading into winter. KMD will now hit up investors for around half of the cost of the acquisition while the regulatory approval process takes place…the acquisition should be very accretive from the get go.

BROKER MOVES;

·         Nufarm Upgraded to Outperform at Macquarie; PT A$6.56

·         Netwealth Cut to Market-weight at Wilsons; Price Target A$8.99

·         Collins Foods Downgraded to Market-weight at Wilsons; PT A$8.49

OUR CALLS

No changes today

Major Movers Today

Have a great night

James the Market Matters Team

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

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