Tag Archives: Energy

article 3 months old

The Overnight Report: Merger Monday

By Greg Peel

The Dow closed up 77 points or 0.4% while the S&P rose 0.5% to 2151 and the Nasdaq gained 1.0%.

What The?

Nobody picked the open on the Australian stock market yesterday, except maybe whoever was placing big sell orders. Wall Street and the SPI futures were little changed on Friday night and it looked for all the world like we were in for a quiet session. But at 11am the index was down 53 points.

Sure, there were some standout movers, specifically Healthscope ((HSO)), which dropped another 6% despite stock analysts suggesting Friday’s 19% plunge was probably an overreaction. They also suggest there is no reason Ramsay Health Care ((RHC)) should suffer the same fate but it was down another 4.5% yesterday.

We saw this recently with Estia Health ((EHE)) and aged care peers. These healthcare stocks have been very popular over the past year as safe havens for investment on undeniable underlying themes. Hospitals fit the same bill. This sector had become fully priced despite known regulatory risk.

So now that guidance has disappointed and regulatory risk looms large, investors have taken a sell first and ask questions later approach.

And then there’s Coca-Cola Amatil ((CCL)). The company held an investor day outlining plans to shift further away from increasingly less popular fizzy drinks. Stock analysts for the most part thought it was a positive update. Investors otherwise decided things don’t go better with Coke. CCL led the market down with a 6.5% fall yesterday.

Since July, the stock had rallied 25%. So once again investors ran in panic that their safe haven may let them down if the fizzy drink is truly dead.

The Healthscopes and Cokes notwithstanding, yesterday morning saw a big market-wide sell-off on the open before a slow grind back to a more respectable, albeit weak, close. The banks led the fightback as investors look to lock in dividends ahead of the cut-off following result releases beginning this week.

This market is sure jumpy, and AGM season has only just begun. What further horrors await?

Wall Street is up overnight, which is nice, but the futures are only suggesting up 3 points for the ASX200 today – not much of a bounce given yesterday’s action. This is likely because Wall Street strength was really US-centric and not macro-reflective.

It’s Time

There was only one topic of conversation on Wall Street last night and that was M&A. Elsewhere, nothing was happening.

For some reason Monday is always the preferred day for merger announcements and last night was no exception. The biggie is AT&T’s (Dow) intention to merge with Time Warner – a deal that will need to jump a few regulatory hurdles.

There were also mergers announced in stock trading and aerospace, among others, while Genworth Financial, major shareholder of Genworth Mortgage Insurance Australia ((GMA)), announced it had sold itself to the Chinese.

Wall Street likes mergers, as they are typically positive for stock valuations. Many a commentator has noted that the long period of corporate stock buybacks seen over the past several years of ultra-low financing costs is coming to an end, to be replaced by actual investment through M&A.

This is a positive, at least to begin with. Typically mega-mergers tend to signal the peak of a bull market.

The Dow was up over a hundred points early on last night but drifted back to a less exciting close. With the oil price and US dollar steady, and nothing overly consequential within data releases, it was a session focused solely upon the alpha of US M&A and earnings reports and not the beta of macro developments.

On the subject of earnings, a flying start has given way to some more mixed results, with revenues amongst some of the biggest reporting companies still tending to disappoint. However, on the earnings line, beats to date are running at 78% compared to the long term average of 64%.

It’s still early. This week is the busiest on the calendar.

Commodities

Iraq has been fighting wars since the 1980s. Iran has only just returned from global export sanctions. Nigeria and Libya have their own problems, and let’s not even start on Venezuela. These are all reasons the Saudis seem to feel are fair enough in granting exemptions from any OPEC production freeze.

But with that many exemptions, is a freeze even possible? Well, apparently Russia is on board. If Saudi Arabia and Russia can agree on a freeze, that’s a big chunk of global production. The oil market is unsure, which is why the WTI price has recovered to US$50 and stopped dead.

West Texas crude is down US24c at US$50.63/bbl.

The US dollar index is steady at 98.69 but LME traders were last night focused on improving US and eurozone manufacturing PMIs, if last night’s flash estimates prove accurate, and a general pick-up in Chinese demand.

Aluminium and copper were flat last night but lead and nickel rose 1.5% and zinc 2.5%.

Iron ore rose US30c to US$58.70/t.

Gold is as good as steady at US$1264.00/oz and the Aussie is steady at US$0.7608, awaiting tomorrow’s local CPI numbers.

Today

The SPI Overnight closed up 3 points.

US data tonight include the Richmond Fed index, house prices and consumer confidence. And it is a huge session for major earnings releases.

It’s a big day for AGMs locally, with the likes of Bendigo & Adelaide Bank ((BEN)), Tabcorp ((TAH)) and WorleyParsons ((WOR)) among that number. Fortescue Metals ((FMG)) is one company hosting an investor day while Mirvac Group ((MGR)) will provide a quarterly update.

Rudi will link up with Sky Business today, around 11.15am through Skype, to discuss broker calls for about 10 minutes.
 

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All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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article 3 months old

The Monday Report

By Greg Peel

Hospital Pass

Friday’s trade on the local market began with a whimper and it looked like a dull old Friday session was upon us. But never underestimate AGM season.

Healthscope ((HSO)) downgraded FY17 guidance at its AGM and set off a market plunge. At one point the stock was down over 20% and hospital peer Ramsay Health Care ((RHC)) was being dragged down in the vortex before at least some support was found. The ASX200 was down 32 points at midday but by 1pm was right back where it started.

Healthscope still finished the session down 19% and Ramsay 6% to provide a 2.9% drop for healthcare, by far the worst sector performer on the day. A dip in the oil price overnight had energy down 1.1% while the banks provided much of the offset in rising 0.4%.

The panic reaction in the hospital stocks just goes to show how much faith had been shown by investors in these sectors as being rare pockets of safety. The story is hard to argue with – ageing population and so forth – but regulatory issues linger and these stocks have been well priced.

What we also saw on Friday was a willingness in the market to jump in and buy stocks on a dip. We also see a willingness to sell on a spike. The market is presently being dominated by short term traders who are happy to buy at 5400 and sell at 5500 while there’s nothing much else going on in the world.

Yet. It’s all in front of us.

Flat as a Tack

It’s the same story on Wall Street. Friday night saw the Dow close down 16 points, but not before recovering from an initial 100 point drop. The S&P closed flat at 2141 and the Nasdaq gained 0.3%.

The Nasdaq outperformed thanks to old stalwart Microsoft, also a Dow component. Microsoft had posted an earnings beat in the aftermarket on Thursday and closed Friday at a new record high in rising 4%. The stock had only just recently regained its 1999 tech bubble high.

Another Dow winner on the day was McDonalds, which posted its first earnings beat in some time despite the Creepy Clown craze in the US forcing Ronald into temporary hiding. Mickey D’s rose 3%.

The Dow loser on the day was industrial behemoth General Electric which missed on revenue and initially fell 2.5%, providing a lot of the early Dow plunge. GE shares did manage to rally back to a close of only down 0.5% nonetheless.

There were no US economic data releases to speak of on Friday night and despite it being expiry day for October equity derivatives, volume was low and volatility minimal.

This week, by contrast, sees a wealth of US data, culminating on Friday night with the first estimate of September quarter GDP. This will play into Fed thinking.

But we are yet to start ticking off the major events currently impeding market progress – the November Fed meeting, the US election, the OPEC meeting and the December Fed meeting. In the meantime, what is continuing to be a positive US earnings season is having little market impact.

Commodities

West Texas crude had dropped on Thursday night to close under US$50 at expiry of the November delivery contract but on Friday night the new December front month contract rose US24c to US$50.87/bbl.

Commodity prices continue to battle the headwind of a rising US dollar which on Friday night rose another 0.4% to 98.64.

Aluminium was the only base metal to finish in the green while nickel and zinc were the only metals to fall by more than 1%.

Iron ore was unchanged at US$58.40/t.

Gold managed to rise US$4.50 to US$1266.70/oz despite the stronger greenback but the Aussie matched the Greenback’s rise with a 0.4% fall to US$0.7604.

The SPI Overnight closed down one point on Saturday morning.

The Week Ahead

A busy week for US data ahead of next week’s Fed meeting sees the Chicago Fed national activity index and a flash estimate of manufacturing PMI tonight and Case-Shiller and FHFA house prices, Conference Board monthly consumer confidence and Richmond Fed index tomorrow.

Wednesday it’s new home sales, the trade balance and a flash estimate of the services PMI, Thursday it’s durable goods and pending home sales, and Friday brings personal income & spending, along with the Fed’s preferred PCE inflation measure, Michigan Uni fortnightly consumer sentiment and the first estimate of September quarter GDP.

The market is forecasting 2.5% growth, up from a disappointing 1.4% in the June quarter.

The UK will release its GDP result on Thursday.

The influential German IFO business sentiment index is out tomorrow, Japan sees inflation data on Friday and New Zealand markets are closed today.

In Australia the big data event will be September quarter CPI on Wednesday. This will very much determine RBA policy. The PPI is due on Friday along with new homes sales.

It’s a huge week on the local stock front, dominated by the busiest week for this round of AGMs. There are a handful of production report laggards among the resource sectors while Wesfarmers ((WES)) will release quarterly sales numbers on Wednesday and Woolworths ((WOW)) on Friday.

ResMed ((RMD)) will release quarterly earnings on Wednesday ahead of the full-year result from National Bank ((NAB)) on Thursday and half-year from Macquarie Group ((MQG)) on Friday.

There is also a raft of other quarterly updates and investor days.

Rudi will appear on Sky Business on Tuesday, via Skype, to discuss broker calls around 11.15am. He'll re-appear on Wednesday to host Your Money, Your Call, 8-9.30pm. Then on Thursday he'll be in the studio, 12.30-2.30pm. On Friday, he'll close the week with another Skype-cross to discuss broker calls, probably around 11.05am.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

For further global economic release dates and local company events please refer to the FNArena Calendar.

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article 3 months old

The Overnight Report: Bungling Along

By Greg Peel

The Dow closed down 40 points or 0.2% while the S&P fell 0.1% to 2141 and the Nasdaq fell 0.1%.

Job Shock

The net number of jobs in Australia declined by 9,800 in September and the August number was revised down to a loss of 8,600 jobs from a previously reported 3,900. That’s not great news in itself, but the real shock came on the breakdown of the September numbers.

Full-time jobs fell by a whopping 53,000 – the biggest drop since 2009 – offset by a 43,200 rise in part-time jobs. The increasingly misleading unemployment rate fell to 5.6% from 5.7% but only because participation fell. Underemployment stands at a record 8.7%.

Now, the ABS did warn that the rotation of new group into the survey has distorted the numbers somewhat, given that group had a lower labour intensity than the group rotated out. This group rotation is intended to provide for a more complete picture but only leads to volatility in the results. There is no getting past the fact full-time jobs are on the wane and part-time jobs are rising.

That’s why wage growth is almost non-existent. Earlier this week the RBA governor suggested there would be no change to monetary policy unless one or more of three risks eventuated – the housing bubble burst, the labour market deteriorated and/or inflation remained lower than expected. Well, surely the labour market is deteriorating if more and more workers are forced to take fewer hours than they’d like.

And that plays into low inflation, given the impact on wage growth.

No surprise therefore that the Aussie tanked on yesterday’s numbers. It continued to fall overnight as the US dollar rallied and is down 1.1% over 24 hours to US$0.7631.

The jobs numbers had no notable effect on the Australian stock market yesterday which, after a bizarre spike and drop on the open probably related to the expiry of October futures, meandered slightly higher and then back down again to the close. As markets around the world await the big global events coming up, the local market is currently trading in alpha mode on individual corporate AGMs and quarterly reports and not going anywhere much index-wise, just as was the case for most of the August result season.

Looking at yesterday’s sector moves there is no discernible macro pattern. The leader on the day was energy (+1.1%) thanks to the stronger oil price, which will probably lead to the downside today on oil’s pullback.

Sideways

The ECB left rates unchanged at its policy meeting last night as expected, but at the subsequent press conference Mario Draghi suggested there was no talk of either extending QE or tapering QE. The central bank will do whatever is deemed necessary as events unfold.

Recently the ECB has chosen its December meeting as the time to make changes which likely relates to the Fed doing the same. Like everyone else, Draghi is no doubt waiting to see what happens with the US election (and the Italian referendum), OPEC and the Fed.

It looks like the forex market was backing a more hawkish outcome because the euro took a dive after the press conference, sending the US dollar index up 0.4% to 98.30.

The S&P500 has now racked up 79 consecutive days of no move greater and 1% in either direction, since the Brexit plunge-and-bounce. It’s the longest stretch in 21 years. True to form, having risen 40 points on Wednesday night, last night the Dow fell 40 points.

One reason is oil. Having shot up on Wednesday night on inventory data, the WTI price shot back down again last night for no apparent reason. But this can easily be explained by last night’s expiry of the November delivery front month contract.

On the corporate earnings front, the results came thick and fast last night and for the most part they represented beats, with some notable exceptions. Among the Dow components, American Express held onto its 5% aftermarket gain of the night before but insurance company Travelers copped a 6% drop and telco Verizon a 2.5% drop, leading the Dow to underperform the S&P.

This morning’s major aftermarket reporter was Microsoft (Dow), the shares of which are up 6%.

Barring anything unforeseen, there is currently no reason to believe the S&P won’t extend its run of negligible volatility, at least until aforementioned pivotal events play out.

To that end, the general feeling is no one won yesterday’s presidential debate, but then no one lost either. Wall Street continues to assume a Clinton victory, while at the same time citing the Brexit vote as reason not to be completely confident, and fearing the unlikely result of the Democrats taking the House. To do so would require a landslide swing.

Commodities

West Texas crude closed down US95c at US$50.43/bbl. If true to form, it may bounce back tonight in the new December delivery front month contract.

The stronger US dollar appeared to weigh on base metal prices last night, given copper fell 0.5%, aluminium and zinc fell 1% and nickel 2%, while lead rose 1%.

Iron ore rose US40c to US$58.40/t.

The stronger greenback has gold down US$6.60 at US$1262.20/oz.

Today

The SPI Overnight closed down one point.

It’s a quiet 24 hours around the globe data-wise, although Chinese property prices might be interesting.

It’s another busy day for local AGMs, with Insurance Australia Group ((IAG)) and Qantas ((QAN)) the stand-outs while Japara Healthcare ((JHC)) might draw some attention.

Santos ((STO)) will release its quarterly production report.

Rudi will link up with Sky Business today, via Skype, to discuss broker calls at around 11.05am.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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article 3 months old

Caltex: The Battle For Woolworths’ Petrol Business

Speculation is mounting regarding the potential disposal of the Woolworths fuel business and Caltex has thrown its hat in the ring.

-Loss of Woolworths volumes unlikely to be entirely offset in the medium term 
-Opportunities for Caltex, given its competitive infrastructure network
-Concern the company may abandon capital discipline to chase the bid


By Eva Brocklehurst

Caltex ((CTX)) has confirmed its interest in the Woolworths ((WOW)) fuels business, flagging the submission of a conditional and confidential bid. Caltex is currently the exclusive supplier of petrol and diesel to the Woolworths fuel outlets.

The loss of 3.5bn litres in Woolworths fuels volume – the number confirmed by Caltex - out of the 15.7bn litres it sells, would be a significant negative, given the scale this provides to the operation of the infrastructure network, but Ord Minnett is one broker that is confident the company could adapt. The broker notes BP, according to press reports, appears to be favoured to win the business. BP has greater flexibility in its operating model as some operators run the store while BP as the head lessor, retains its branding and supplies the fuel.

Some of the implications brokers consider include the fact that any change of control of Woolworths fuel would take some time. The Australian Competition and Consumer Commission (ACCC) would have a keen interest in assessing the implications for the retail fuel industry and may require sites to be divested if BP wins the contract, which could then provide incremental sites for Caltex. Foreign Investment Review Board approval is also likely to be required.

Ord Minnett notes the Caltex infrastructure network has a competitive advantage, especially in Sydney and Brisbane, and it is unclear how BP would supply Woolworths in these markets. Caltex could also access a new loyalty partner. The broker notes two major alliances, BP and Velocity (Virgin Australia) and Woolworths and Qantas ((QAN)) (Frequent Flyer), are in play.

The loss of the Woolworths volumes is unlikely to be offset entirely in the medium term if Caltex loses but some volumes could be partially offset by growing third party distribution, and transport fuels margin per product is likely to expand while reduce in aggregate, in Ord Minnett's estimates. Moreover, Caltex has well flagged ambitions to expand its convenience operations and this may present an opportunity as key part of its medium-term strategic growth.

A review of Lytton refinery is also possible. The broker notes Caltex has been disciplined regarding the continued operation of Lytton, with a focus on strict financial hurdles. Finally, if Caltex were unsuccessful regarding the Woolworths business, another round of capital management to return some of the $850m in franking credits is possible. Caltex has stated it will be disciplined in its bid but there is downside risk if a competitor such as BP or Vittol is successful, as the fuel supply agreement could be terminated.

This supply agreement represents 22% of annual sales volume and UBS estimates it generates a margin of 2-2.5c per litre. The broker calculates the termination of the supply agreement could negatively impact EBIT (earnings before interest and tax) by $70-90m per annum, which represents 8-10% of forecast 2016 EBIT. Assuming an 18 month to two year delay before any supply agreement is cancelled the broker estimates $2.40-3.00 per share downside to valuation. In the event of success, upside will depend on the price Caltex pays and any further value uplift via synergies.

Credit Suisse cannot envisage any rational way, economically, that BP can outbid Caltex, but accepts the risk exists. Yet the risk to earnings per share is far lower than the actual volumes suggest and can be offset both operationally and through buy-backs, in the broker's view. There are plenty of growth options, too, for Caltex if it loses the Woolworths business. This is not to suggest, Credit Suisse emphasises, that it does not believe the business is a natural fit for Caltex.

The issue is about competitive infrastructure, which BP does not have in NSW and Queensland. BP has a small site in Newcastle and an agreement with Vittol at Parramatta and takes all its retail product from Caltex in south Queensland after closing Bulwer Island. Acquiring the Woolworths assets makes sense for Caltex but Credit Suisse would also applaud the company's capital discipline if it did not chase a deal at any cost.

The broker suspects there is a lot of competitive posturing going on between the seller and potential bidders. In a scenario where no company ends up buying the assets - where BP baulks at the economics and Caltex refuses to bid higher – the broker believes the loser is likely to be Woolworths.

Moreover, BP has been divesting assets aggressively in the past few years and has not allocated much capital downstream, and Credit Suisse considers it would be an unusual strategic step to spend a decent amount of capital on Australian downstream business to buy low-quality retail sites.

Citi believes the announcement from Caltex confirming the bid is an acceptance that it could lose the wholesale supply agreement. The fact that Caltex has also disclosed that the alliance and agreement are dependent on continued ownership of the sites by Woolworths is a signal to the broker that Caltex does not envisage it will successfully acquire the assets.

Citi agrees that losing the volumes would impact earnings, and could be partially offset by supply logistics services to the successful acquirer or by acquiring retail outlets that were forcibly divested by the rival to appease the ACCC.

Macquarie envisages a potential negative earnings impact of 3-12% on group EBIT should Caltex lose the agreement and is also concerned that the company's management may be pressured to overpay to secure the asset. On this subject Goldman Sachs is quietly confident that strong capital discipline will prevail at Caltex.

Questions for the broker centre on whether other bidders are competitive and whether the relationship with Woolworths is damaged by the push by Caltex into convenience retail. Goldman, not one of the eight stockbroker's monitored daily on the FNArena database, has a Neutral rating and $32.15 target.

The database shows two Buy and five Hold ratings. The consensus target is $35.34, suggesting 8.0% upside to the last share price. Targets range from $32.60 (Morgan Stanley) to $40.00 (Credit Suisse).
 

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article 3 months old

The Overnight Report: Guarded Optimism

By Greg Peel

The Dow closed up 40 points or 0.2% while the S&P rose 0.2% to 2144 and the Nasdaq was flat.

Fun and Games

The local gaming sector has been very much in the spotlight this week. We saw the casino operators tumble earlier in the week on the news of the arrest of Crown Resorts ((CWN)) employees in China and despite a big initial plunge, and calls of oversold from analysts, Crown and its peers have seen ongoing weakness.

On the flipside yesterday, renewed talk of a merger between the old school tote betting agencies had Tatts ((TTS)) shares up 16% and Tabcorp ((TAH)) up 3% to net out to a leading 1.7% gain for consumer discretionary yesterday.

Otherwise most sector moves were fairly muted in a session that saw a bumpy rally from the open before plateauing out in the afternoon.

There was little excitement generated by China. September quarter GDP came in at 6.7% annual growth as expected and the September retail sales and fixed asset investment numbers were largely as forecast. Industrial production was slightly disappointing.

Perhaps of more interest currently is the Aussie dollar, which despite a Fed December rate hike now being widely expected just continues to track north. It’s up another 0.7% this morning at US$0.7717 which puts it around a technical level that suggests a break-up. We could be at 80 very soon.

The new RBA governor hasn’t helped by talking down the chance of another rate cut but this time around the stronger Aussie is not as ominous as it has been – not as much of a “complication” for the central bank. For this time the Aussie’s strength lends itself not to US dollar weakness thanks to a dovish Fed, crimping Australian economic growth, but to recoveries in the prices of oil, iron ore and especially coal.

So we’re seeing the Aussie run up for the right reasons, being expected improvement in the terms of trade as higher commodity prices flow through with their usual delivery lag.

So long as the Aussie doesn’t run so high as to kill off the revival in the local tourism. Tourism has been running second to a now wobbly housing sector in providing the “non-mining” offset to maintain Australia’s net positive growth. Australia now has to battle the UK as a preferred destination, where as long as you’re not a local you no longer need to mortgage your house to catch a Black Cab.

More Earnings Surprise

As the reports continue to flow, the surprise continues to be to the upside in this US earnings season.

Last night Morgan Stanley posted the last of the Big Bank reports and as has been the case with all of its peers, posted a beat. Smaller regional US banks have also been trotting out better than expected numbers. And last night was the turn of the first of the big oil services companies to report – companies that have suffered greatly through the oil price plunge just as has been the case for their peers downunder.

They, too, posted earnings beats. And it’s not just earnings. The seemingly entrenched post-GFC trend of lower revenues looks like it might be turning around. Net S&P500 earnings growth has swung to the positive at a 0.2% run-rate when an overall decline of 2% was forecast. Revenues are up a net 2.5%.

The other major driver on Wall Street last night was yet again oil. The Saudis continue to talk up the willingness of OPEC and non-OPEC members to join in a production freeze but in the meantime, the tipsters had expected a small rise in US crude inventories last week but instead there was a large drawdown. Thus WTI is up 2%.

Talk now is of oil trading in a US$50-60/bbl range going forward rather than the US$40-50/bbl range assumed previously. That’s enough to ensure positive cash flow for many a global oil & gas producer.

Yet despite an air of greater confidence creeping in, Wall Street is struggling to get excited. Dow up 40 is really neither here nor there when earnings reports are surprising and oil is looking strong.

Aside from calls of over-stretched valuations, Wall Street is no doubt looking ahead to all the near-term uncertainties – the election, the OPEC meeting, the Fed meeting. Not a great time to be rushing in if things don’t turn out as hoped.

And it is October after all. On that note, Happy Anniversary to those who remember.

This morning’s aftermarket earnings reports included American Express (Dow), the shares of which are currently up 5% and EBay, down 6%, and Barbie’s thrilled with a 5% jump for Mattel.

Commodities

West Texas crude is up US98c at US$51.38/bbl.

The trend (or lack thereof) continues for base metals. Aluminium and nickel are down 1% and lead and zinc are up 1%.

Iron ore was unchanged at US$58.00/t.

The US dollar index was again flat, at 97.88, but gold continues to claw its way back. It’s up US$6.80 at US$1268.80/oz.

Today

The SPI Overnight closed up 7 points.

Today sees the local jobs lottery and just after that release, there’s another one of those debates. The last, thank God.

There hasn’t been much discussion about it but the ECB holds a policy meeting tonight. Taper talk?

It’s a very busy day on the local corporate calendar today.

All of Fortescue Metals ((FMG)), Rio Tinto ((RIO)), South32 ((S32)) and Woodside Petroleum ((WPL)) post quarterly production reports.

Brambles ((BXB)) and Westfield ((WFD)) are among those providing quarterly updates.

Amcor ((AMC)) and, coincidentally, Crown Resorts are among those holding AGMs followed by BHP Billiton ((BHP)) tonight in London.

Ten Network ((TEN)) will release its earnings result.

Rudi will travel to Macquarie Park to appear on Sky Business, 12.30-2.30pm.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

article 3 months old

The Overnight Report: Earnings Revival

By Greg Peel

The Dow closed up 75 points or 0.4% while the S&P gained 0.6% to 2139 as the Nasdaq jumped 0.9%.

5400 Regained

After a choppy start yesterday, the ASX200 ultimately settled into a positive trend to take the index back over the 5400 level. Outside of macro influences, alpha moves were prominent as the AGM season hots up.

To that end we saw a solid update on annuity sales from Challenger ((CGF)) which helped the financials index to a 0.4% gain on the day. A jump in the iron ore price helped materials to a 0.5% gain while bargain hunting continued in the heavily sold off utilities sector, which rose 1.7%.

Ahead of the open yesterday, Philip Lowe made his maiden speech as RBA governor. The upshot is there is not going to be another rate cut if things continue to trend the way they are. But there could be another cut if inflation stays lower for longer, the labour market deteriorates and/or the housing bubble bursts.

The minutes of the September RBA meeting were also out yesterday but the governor rather gazumped those ahead of the release. When it comes to GDP, a big difference between assumptions for the September quarter and forecasts from three to six months ago is that further weakness in oil, iron ore and coal prices that were previously expected have given way to both oil and iron ore stabilising at better levels and coal going through the roof.

The GDP in focus today will be that of China. China’s September quarter result will be released mid-session along with monthly industrial production, retail sales and fixed asset investment numbers. Forecasts are for GDP to remain steady at 6.7%. As for the monthly data, they’ve been all over the shop lately so nothing would surprise.

Change of Heart

Net earnings growth for the S&P500 companies in the US has been negative for the past several quarters despite new highs being hit in the index, which just goes to show what impact central bank policy can have.

The trend has been for analysts to mark down their forecasts heading into result season, suggesting numbers in the order of a 6% decline, before results prove to be a bit better but still negative. This quarter was different in that analysts forecast only a 2% decline.

To date, and it’s still early in the season, results have again been better but this time analysts are now talking the possibility of an actual gain in earnings in the order of 2%. Moreover, while earnings have been disappointing over many quarters, revenues have been even more so, suggesting the only source of any earnings growth has been cost cutting.

This time, and again, it’s still early days, it looks like revenues might just beat as well.

Unfamiliar territory. Last night’s earnings winner was Goldman Sachs, which continued the trend of earnings beats from the banks but in very solid fashion. Among other Dow components, United Health was another big winner, offsetting a weak result from IBM. Johnson & Johnson posted a beat but has had a very solid run this year, hence its shares retreated.

It was those couple of drags that had the Dow only gaining 0.4% last night against the S&P’s 0.6%, while on the other side of the fence the 0.9% jump for the Nasdaq was all about Netflix, which held its 19% share price jump from Monday night’s aftermarket.

In this morning’s aftermarket results, Intel (Dow) has disappointed while Yahoo shares are up.

Outside of earnings, Wall Street’s attention last night was on US inflation.

The headline CPI jumped 0.3% in September to mark its biggest move in five months. It was all about the rebound in the oil price. The net fall in the oil price over a year means headline inflation is running at only 1.5%.

Core inflation, ex food & energy, rose only 0.1% in September but is running at 2.3% annual, above the Fed’s supposed 2% threshold. The Fed nevertheless prefers the PCE inflation measure which in August was still under 2%. There’s nothing in last night’s CPI numbers to prevent the Fed hiking in December.

Commodities

West Texas crude traded lower initially last night which meant a shaky start on Wall Street, but published weekly crude inventory forecasts had WTI turning around to be up US50c at US$50.40/bbl. The 50 level continues to be the inflection point ahead of next month’s OPEC meeting.

The spotlight is on coal and iron ore at the moment and while base metal prices have been jumping up and down a lot, they’re not really going anywhere. Prices were again mixed last night, with leading falling over 1% and nickel rising over 1% to mark the only moves over a percent.

Iron ore rose another US20c to US$58.00/t.

The US dollar index is steady at 97.89 but gold has risen US$7.40 to US$1262.00/oz.

The Aussie rose on the RBA governor’s suggestion of no further rate cuts and is up 0.5% at US$0.7662.

Today

The SPI Overnight closed up 13 points or 0.2%.

If the solid early trend in US earnings results continues it is a positive for the global economy. All eyes will today be on China, nevertheless, and the aforementioned GDP and monthly numbers.

BHP Billiton ((BHP)) will release its quarterly production report today while Ansell ((ANN)), Bellamy's ((BAL)) and Origin Energy ((ORG)) feature among several AGMs today.
 

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article 3 months old

Senex Energy Steps Up Capex And Hedging

As oil production declines in its main area of focus, Senex Energy is leveraging its balance sheet to step up capital expenditure on exploration.

-Increased exploration may offset further declines in production but cash could decline in the interim
-New hedging strategy welcomed by brokers as it underpins positive operating cash flow 
-Further appraisal required in the Western Surat Basin gas project

 

By Eva Brocklehurst

As oil production declines across its main area of focus, Senex Energy ((SXY)) has stepped up its capital expenditure plans alongside moving ahead with its gas project in the Western Surat Basin. Oil production continues to decline across the Cooper Basin, the main area generating cash for the company, as a result of reduced investment. No new oil wells entered production and oil production was down 5% in the September quarter.

As the oil price recovers management appears more willing to use the balance sheet to increase capital expenditure on exploration, which Macquarie expects may offset further declines in production. Senex has identified the first two exploration wells for drilling in PEL 182, to commence by the end of the year. It will also drill the Spartan-1 and Hoplite-1 exploration wells in conjunction with Beach Energy ((BPT)), targeting Namur oil on the western flank.

In conjunction with increased investment in the Cooper Basin, Senex has commenced construction of the surface facilities at the Western Surat gas project. De-risking through further appraisal drilling and de-watering is expected to have a positive impact on Macquarie's core valuation and Senex expects to have a number of pilot production wells online by the end of the year. The broker forecasts the company will increase capital expenditure to $58m in FY17, up from $28m in FY16.

The company has announced results from its unconventional Ethereal-1 gas well in the Cooper Basin, which appear to be below expectations. Another exploration well in the north of the basin will be drilled towards the end of the year. Importantly, Morgan Stanley notes Senex remains free-carried in this program by Origin Energy ((ORG)). The de-risking of the Western Surat continues but the broker believes further appraisal is required to understand the economics and extent of development over time.

Morgan Stanley expects cash will continue to decline as investment in exploration outstrips operating cash flow for a period. The broker's earnings forecasts decrease marginally on the back of updated production and hedging strategies.

The company outlined a new hedging strategy for the second half of FY17. Senex has locked in a price minimum of US$55/bbl for oil using swaps and preserved its exposure to price action above US$60/bbl via call options. Morgans believes this is a good move, given the hedge is above consensus oil forecasts for FY17 and at a lower cost compared with previous hedging.

The broker has a positive view on the company's position in the Surat Basin and its ability to patiently appraise acreage before kicking off with a full scale development. Given its balance sheet strength the broker suspects Senex can avoid some of the operational pitfalls which have impacted on its larger CSG peers, which rushed through appraisal to get going with developing their large-scale CSG-LNG projects. Morgans retains an Add rating and considers exploration and oil prices remain the key risks.

Citi is forecasting oil prices of US$55.5/bbl and estimates the hedging cost will result in a slight earnings downgrade. Still, as the company has essentially ensured positive operating cash flow in FY17 the broker considers this prudent, given a high degree of volatility in the oil price. The broker also notes the Ethereal-1 well performed below expectations, with nitrogen now being pumped into the tubing to help flow back the fracture fluid, which should mean gas rates increase from current levels. The results demonstrate to Citi that unconventional gas prospects take time to unlock.

The broker's base business valuation is 27c a share. a 2% premium to the current share price. Net cash alone constitutes over 30% of the market capitalisation in Citi's estimates. The broker believes, at this level, investors gain cheap exposure to hedged production, leverage to the oil price recovery and a free option on growth.

FNArena's database shows four Buy ratings and two Hold for Senex Energy. The consensus target is 29c, suggesting 11.5% upside to the last share price. Targets range from 25c (Deutsche Bank, Morgan Stanley) to 33c (Citi).
 

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article 3 months old

The Overnight Report: Netflicked

By Greg Peel

The Dow closed down 51 points or 0.3% while the S&P lost 0.3% to 2126 and the Nasdaq fell 0.3%.

Heavy is the Head

The ASX200 was actually in the positive late morning yesterday before it took a sharp turn and then just kept on falling. Maybe a big sell order set things off but in a low volume session, clearly there’s not a lot of faith in the upside at present. It seems the market has grown weary, and wary, and technical forecasts have not been supportive of late either.

The big news was the detention of Crown Resorts ((CWN)) staff in China under laws regarding the promotion of gambling, but this was known on the open. Crown shares fell 14% and dragged down fellow gaming stocks and others with a Crown connection, such as Barangaroo developer Lend Lease ((LLC)). Consumer discretionary was the big sector loser on the day with a 2.5% fall.

Investors also went back to shifting out of yield stocks such as telcos, utilities and the banks, but after a strong run the resource sectors were also weaker and in the wash-up, it was really just a sell-the-market session.

There’s a lot hanging over the market between now and Christmas which is quite simply out of investors’ control. At the macro level we have China’s GDP tomorrow, a Fed meeting on November 2, the US election on November 8, the OPEC meeting in late November and the critical Fed meeting in mid-December. For the next few weeks we have US earnings season to provide general direction from Wall Street.

A lot of those events offer largely binary outcomes, which is not the way investors like to play it. At the micro level locally we are heading into AGM season, in which companies typically set or adjust FY17 guidance. This period is second only to earnings season in the potential for sharp alpha moves. And there’s still the matter of bank capital requirements to be resolved at some point.

Stand aside and wait? Perhaps that’s the current thinking.

Sagging

US industrial production rose 0.1% in September having fallen 0.5% in August. The Empire State index showed manufacturing in the New York Fed district contracted at a steeper pace, falling to minus 6.8 from minus 2.0 last month (zero neutral).

Bank of America joined its peers in reporting a beat on earnings but as was the case on Friday, when all of JP Morgan, Wells Fargo and Citigroup reported, the banks couldn’t catch a bid. The feeling is they had already had a good run on Fed rate hike speculation.

Fed vice chair Stanley Fischer added more confusion to the Fed policy debate by suggesting current low interest rates do not threaten US financial stability, noting a number of factors from weak productivity to an ageing population are holding rates back. Rate hike? No rate hike? Who knows?

Monthly production data showed Saudi Arabia and its OPEC peers are still pumping out oil at record rates. This is possibly a last hurrah ahead of actually capping production or it simply makes a mockery of the market – talk up the potential for an agreement, watch the oil price rise, and then produce and sell as much of the stuff as physically possible before the price tanks once more on no agreement.

Put it altogether and it was a soggy day on Wall Street. Plenty to be worried about, nothing to get excited about. But trading was generally lacklustre and the indices tracked sideways all afternoon.

Things changed after the closing bell. In a clash of Old Tech and New Tech, IBM (Dow) shares are down 3% in the aftermarket after Big Blue posted its earnings report, while shares in Netflix are up 19%. Having disappointed at the prior earnings season by missing on domestic subscriber growth guidance, the video streamer this time around astounded with international subscriber growth.

Netflix may only represent a niche in the market and it remains early days in the earnings season, but results like these, from companies of the future rather than the past, provide some confidence going forward.

Commodities

After running up hard on OPEC production cut talk, oil has been drifting quietly lower these past few sessions. WTI is now trading just under the psychological level of US$50/bbl, down US40c at US$49.90/bbl.

The US dollar index has pulled back 0.2% to 97.87 but this has not provided much of a boost for base metals. Aluminium is down 1% and nickel 2% amongst otherwise smallish moves.

But iron ore jumped US$1.00 to US$57.80/lb.

Gold is up a tad at US$1254.60/oz.

The Aussie is up 0.2% at US$0.7625.

Today

After yesterday’s low volume sell-off, the SPI Overnight closed up 3 points.

The minutes of the September RBA meeting are out today but Philip Lowe will also be speaking, which will be more pertinent.

Tonight sees US data on CPI and housing sentiment.

Amidst today’s local corporate action we’ll see quarterly production reports from Oil Search ((OSH)) and Newcrest Mining ((NCM)) while high-flying Cochlear ((COH)) will hold its AGM.
 

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article 3 months old

Material Matters: Gold, Copper and Energy

Gold outlook for 2017; copper's performance in 2016 and outlook for 2017; previews ahead of production reports from the energy sector.

-Credit Suisse maintains a bullish outlook for gold, supported by supply/demand deficits
-Soft copper concentrates market to continue amid more modest surplus in 2017
-Lagged impact of oil prices on LNG to translate into stronger Sept qtr revenue

 

By Eva Brocklehurst

Gold

Since August, the focus for gold has shifted to the near-term drivers such as an impending rate hike from the US Federal Reserve, a strong US dollar and a reduced likelihood of a Trump presidency. Credit Suisse observes gold futures appear to have driven a gold sell-off, with 8.2m ozs of outflows since July 5. Holdings in exchange traded funds (ETF) have steadily increased, albeit at a slower pace than earlier in the year.

The broker reiterates a forecast for gold at US$1,400/oz in 2017. This bullish forecast is driven by continued uncertainty, wealth preservation and mine supply, supported by supply/demand deficits that are forecast to continue. A higher 2017 deficit is expected to be supported by declining gold mine supply, sustained demand from ETFs and central banks, and a small rebound in gold jewellery demand.

Copper

Copper has been the weakest performer of the major commodities in 2016 and Macquarie observes it is the supply side which has been strong. Copper mines have experienced few disruptions this year amid success from new entrants to the market. The broker envisages a soft concentrates market will continue.

Chilean mine output is down 4.1% in the year to August amid lower grades at the world's number one mine, Escondida. Macquarie is looking for a pick-up in output from Chile in the second half, although July and August data appeared unusually weak. Meanwhile, neighbour Peru is gaining ground on the number one, taking a leap forward as the result of the commissioning of a couple of key projects. Production is up 45.5% in the year to August.

Macquarie is sure benchmark treatment and refining charges (TC/RC) will be higher next year in China. This year they settled at US$95.35/t/9.735c/lb. Early indications suggest a settlement in the US$105-110/t and US10.5-11c/lb range. Chinese imports were down 7.9% to August and discounts have been generally suppressed this year, Macquarie observes.

Meanwhile, the scrap market is looking tighter. In sum, the broker believes increased supply, specifically in concentrates, will underpin the soft market, notwithstanding recent question marks over Chile's production and tight scrap markets.

Credit Suisse has increased its 2017 price forecast for copper, assuming a more modest surplus which factors in a slower ramp-up in Peru and a delayed restart of Glencore's African mines until after 2019.

The broker increases its price forecast to US$2.00/lb for 2017-18. Large surpluses are expected to remain in 2018-19 and are likely to depress the price, leading the broker to maintain a forecast for US$1.95/lb through that period. The long-term price estimate of US$3.00/lb is unchanged.

Energy

Oil prices have been fairly flat in the September quarter but UBS expects there are better times ahead. Brent crude has recently been more positive, largely because of the suggestion by OPEC (Organisation of Petroleum Exporting Countries) to consider reducing output. Allocation of the production cuts is expected at the November meeting.

Despite oil prices being almost flat, LNG prices are likely to have rallied. The 3-month lagged Japanese custom cleared price rose 23.5% in the quarter and UBS believes this should benefit all LNG producers, although Woodside Petroleum ((WPL)) is likely to witness a smaller lift in realised pricing because of the downside protection in some of its LNG contracts.

Australian energy companies are about to release September quarter production results and UBS looks looks for progress on Woodside's re-contracting of mid-term LNG contracts as well as an update on the proposed Senegal acquisition. For Oil Search ((OSH)) the broker looks for confirmation of PNG LNG's performance with trains one and two as well as progress on exploration.

The GLNG ramp-up will be the focus for Santos ((STO)), while for Beach Energy ((BPT)) the broker looks for any indication of the possible size of the Kangaroo discovery. For AWE ((AWE)) the broker looks for an update on Waitsia and Ande Ande Lumut. The focus for Horizon Oil ((HZN)) will be an update on the Beibu phase II.

Macquarie envisages most of the sector is fully valued on the back of positive sentiment, albeit little action, from OPEC. The broker expects the lagged impact of oil prices on LNG to translate into stronger revenue in the September quarter. Revenue for mid cap producers is expected to fall slightly. Operations at Woodside and Oils Search, in particular, will come under scrutiny as theses two have moved out of their high capex phase.

Macquarie expects the more mundane business of maintenance cycles and operation outages will become a bigger point of contention to maximise revenue going forward. Santos is expected to report consistent production from Fairview and, more interesting from Macquarie's perspective, strong production at Roma from September 1.

Acquisitions are also expected to feature, given Woodside's oil acquisition in offshore Senegal and a gas acquisition in offshore Australia. The proposed deal by Karoon Gas ((KAR)) with Petrobras in Brazil, if successful, is expected to push that company into becoming a significant oil producer.
 

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article 3 months old

The Monday Report

By Greg Peel

Flat

It was a choppy session on Friday on the local bourse leading ultimately to a flat close. A fairly tight range belied some notable moves in sectors nevertheless.

Winners on the day included industrials (0.7%), utilities (0.7%), telcos (0.3%) and consumer staples (0.3%) while losers included the banks (-0.3%) and materials (-0.5%). Energy closed on a rare 0%. Here we see further evidence of a reversal of the theme of the past few weeks in which overbought yield stocks have been sold off on Fed rate rise expectations and undervalued cyclicals have come back to the fore.

It has been a substantial sell-off in yield stocks, and thus no surprise some consolidation has eventuated. But interestingly the initial trigger for the reversal of prior rotation was China’s trade data last week which surprised to the downside, reigniting China slowdown fears and perhaps raising doubts of a Fed rate hike being “baked in”. Friday’s Chinese data release paints a different picture.

China’s CPI rose 1.9% year on year in September having risen only 1.3% in August, beating expectations of +1.6%. But the big news is the PPI, which rose 0.1% to mark its first gain in five years. In August the PPI was down 0.8% and September forecasts had a 0.3% drop.

China’s producer price index had been in the negative since 2012 but recent months have shown it quietly beginning to graft its way back. Last month saw a turning point, which goes some way to relieving fears of Japanese-style entrenched deflation becoming the long term story for China – the twenty-first century’s version of the Japanese economic miracle.

The inflation data provide a little bit of confidence heading into this week’s major data event on Wednesday, which sees September industrial production, retail sales and fixed asset investment numbers along with the September quarter GDP result. Forecasts are for GDP growth to hold steady at 6.7%.

Yellen Gets Hot

While tradition has the Alcoa result signalling the beginning of any US quarterly earnings season, most now consider the real kick-off to be on the subsequent Friday, when all of JP Morgan (Dow), Citigroup and Wells Fargo report. A good result from the banks provides some confidence for the rest of the season.

All three reported earnings beats on Friday night, mostly due to elevated trading volumes in the fixed income market. US bank shares have been in a bit of a push me-pull you lately, on strength from Fed rate hike expectations on the one hand and weakness on European bank fears, Deutsche Bank in particular, on the other.

Friday night also saw all-important US retail sales numbers which showed a 0.6% gain in September. This was a tad shy of 0.7% expectations but not enough to alter any assumptions regarding Fed policy. The US PPI also continues to creep higher, rising 0.3% on the core in September to be 1.5% higher year on year.

Fed watchers may have been jolted, nonetheless, by comments made by Janet Yellen in a speech on Friday night, in which she suggested that in order to reverse the effects of the GFC recession it might be best to run “high pressure” economy with a tight labour market. The way to run a hot economy is, of course, to not fight heat with rate hikes.

December off again? No. Yellen’s supposed paradigm shift simply plays into what she and fellow FOMC members have been stressing for some time – subsequent policy tightening will be very gradual. While central bank preference is to get ahead of any potential inflation spikes, the implication is that a bit of inflation is a good thing in the post-GFC world.

This is longer term good news for the US stock market, and as such the Dow was up as many as 160 points early on. But just as Thursday’s 180 point fall was pared back to only a 45 point fall, Friday’s 160 point gain was ultimately pared back to only a 39 point, or 0.2%, gain. The S&P closed flat at 2132 and the Nasdaq closed flat.

The US dollar index, on the other hand, rose another 0.6% to 98.10. The dollar is quietly becoming what the RBA might call a “complication”, but that’s what you get with a rate rise. Friday’s retail sales and PPI data no doubt helped pushed the greenback along.

And having slipped back on last week’s weak Chinese trade numbers, Friday night saw the US ten-year yield pop up 6 basis points to reclaim 1.79%.

Commodities

The stronger greenback is acting as a drag on commodity prices but demand-supply equations remain the dominant theme.

West Texas crude closed down US16c on Friday night and at once stage dipped below 50, which is one reason Wall Street came off the boil.

Aluminium and copper both fell 1% on the LME but nickel and zinc each rose 0.5%.

Iron ore rose US20c to US$56.80/t.

Gold fell US$5.70 to US$1251.80/oz.

The strong greenback should be good news for the Australian economy by pushing down the Aussie and thus supporting the non-mining economic revival. But it is mining that is enjoying a revival at present – particularly coal – hence the Aussie is up 0.6% at US$0.7610.

The SPI Overnight closed down 9 points on Saturday morning.

The Week Ahead

China’s GDP result, as noted, will take centre stage, but US earnings season will dominate the week as the results start to come thick and fast, including from many Dow components.

There are also a lot of US data releases to mull over this week. Tonight it’s industrial production and the Empire State activity index, Tuesday it’s housing sentiment and the CPI, and Wednesday brings housing starts and the Fed Beige Book. Thursday sees leading economic indicators, existing home sales and the Philadelphia Fed activity index.

The ECB will hold a policy meeting on Thursday night amidst rumours, since quashed but not with any conviction, that QE tapering is being considered.

The minutes of the September RBA meeting are out tomorrow ahead of September jobs data on Thursday.

The local stock market calendar is beginning to fill up once more and this week sees a rush of resource sector production reports alongside various corporate quarterly updates and a building number of AGMs.

Today’s highlights include production reports from Evolution Mining ((EVN)) and Whitehaven Coal ((WHC)) and a quarterly result from James Hardie ((JHX)).

Rudi will appear on Sky Business on Thursday, 12.30-2.30pm, and again on Friday, through Skype-link, to discuss broker calls at around 11.05am.

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For further global economic release dates and local company events please refer to the FNArena Calendar.

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