The Monday Report

This story features DOWNER EDI LIMITED, and other companies. For more info SHARE ANALYSIS: DOW

By Greg Peel

Upper

Engineering & contracting company Downer EDI ((DOW)) had been doing everything right in the eyes of shareholders up until last week, shifting focus away from the stagnant mining sector and towards more buoyant pursuits in infrastructure. Downer’s share price had doubled in a year from its mining slump depths.

But the company’s takeover bid for serially troubled Spotless Group ((SPO)) has brought that all undone. Analysts could not see the rationale beyond further diversification for diversification sake, especially at the near 60% premium offered to Spotless shareholders. On Friday it revealed Downer’s attempted capital raising to fund the takeover had fallen short. Downer shares promptly plunged -25%.

It was the one standout disaster in an otherwise surprisingly strong session on the local market, one that finally looked more home grown than Trump driven. Thanks to Downer, industrials were the only sector to finish in the red. The big leader on the day were the banks, up 1.2%.

The banks rallied given a rush by all who hadn’t already done so to raise rates on investor home loans. Given the RBA cash rate is going nowhere, the implication is higher net interest margins and thus stronger earnings. The problem is the reason the banks have all raised, or perhaps the excuse for it, is higher US rates, since confirmed by the Fed rate rise. This means a higher offshore funding cost for the banks.

There is likely also an element of getting in ahead of the regulator. As Sydney-Melbourne house prices continue to soar on the back of a renewed spurt of interest from investors, APRA is once again circling. The end result will likely be further tightening of lending regulations.

The consumer sectors and healthcare also proved popular on Friday, while telcos (+1.5%) found renewed support after a soft week. The miners took a breather.

Policy Confusion

It was a roller coaster ride on Wall Street on Friday night. The Dow was up 50 early in the session and down -100 late in the session before closing down a mere -4 points. The S&P closed -0.1% lower at 2345 and the Nasdaq lost -0.1%.

When we left Wall Street on Thursday night, it appeared as if Trump’s healthcare bill would not be put to Congress that week due to lack of numbers in support. But on Friday morning in New York it was learned the bill was indeed to be put to the vote in the afternoon. Assuming this meant the numbers were now in Trump’s favour, US indices rallied.

It doesn’t necessarily mean Wall Street likes Trump’s healthcare policy, it just means with healthcare out of the way, the administration can move onto the more important task of sorting out tax reform. And if Trump had managed to swing the dissenters, it also eases fears of all of Trump’s policies meeting with resistance from his own party.

However it turned out Trump had decided to go to the vote without the numbers in place. As this became apparent, Wall Street turned and fled once more. Sure enough, the vote was cancelled. Trump blamed the minority opposition.

The late news from the White House was that rather than going back to the drawing room on health, thus pushing tax reform further into the unknown future, Trump would continue to work on healthcare but also move onto tax reform. Back went Wall Street, all the way to square.

Will tax reform meet with the same degree of opposition among Republicans? Well we’re yet to see any definitive policy. We do know that cutting the corporate tax rate is a generally popular proposition, but we also know a border adjustment tax is not. If an unpopular BAT is included in the package, and more specifically if a BAT is included not just as a desire but as a necessary means of helping to fund corporate tax cuts, then tax could go the way of health.

This week on Wall Street will therefore again be dominated by politics. The most likely near term move is sideways, until details emerge.

Commodities

The US dollar index was again flat on Friday, at 99.69, as Washington took centre stage.

Lead and nickel both fell a percent in London, being the only real movers among the base metals.

Iron ore fell -US$1.20 to US$84.40/t.

Gold is steady at US$1244.40/oz.

The Aussie is steady at US$0.7624.

West Texas crude rose US38c to US$48.08/bbl on Friday night, ahead of a meeting of OPEC and non-OPEC oil ministers over the weekend. At the meeting, the ministers agreed to extend production cuts for another six months, through to the end of this year.

The decision is somewhat at odds with talk coming from OPEC spokespeople in the last couple of weeks, which lent more towards the cuts not being extended. Alongside record US crude inventories, it is for this reason WTI has slipped back below US$50. One presumes, therefore, that oil markets will react positively tonight.

The Australia energy sector has the opportunity to respond today.

The SPI Overnight closed up one point on Saturday morning.

The Week Ahead

This week will once again focus on Washington. If Trump is indeed now looking to reveal a tax reform policy, Wall Street will be salivating in anticipation, and rather nervous.

US data releases this week include Case-Shiller house prices, Conference Board monthly consumer confidence and the Richmond Fed activity index tomorrow, pending home sales on Wednesday and a “final” revision of December quarter GDP on Thursday.

Friday it’s the Chicago PMI, Michigan Uni fortnightly consumer sentiment and personal income & spending. The latter includes the Fed’s preferred measure of inflation.

Is Beijing taking another step towards conforming with Western financial markets? The first of April is next Saturday, and the first of any month is global manufacturing PMI day unless it’s the weekend, in which case it moves to the Monday, other than in China, where weekends are irrelevant. But this time Beijing is not releasing on the Saturday as one might expect. The release has come forward one day, to Friday, for both the official Chinese manufacturing and services PMIs.

The only data release of any note in Australia this week is an important one in the current context – private sector credit on Friday.

Bank of Queensland ((BOQ)) will report earnings on Thursday.

There is a small number of remaining ex-divs to work through this week.

Rudi will appear on Sky Business on Tuesday, via Skype, to discuss broker calls around 11.15am. He'll appear in the studio late on Wednesday, to host Your Money, Your Call Equities, 8-9pm. He'll re-appear in the studio on Thursday, noon-2pm. On Friday, he'll resume the Skype experience, probably around 11.20am.
 

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