Market Update & Important Indicators
Rising tensions between the U.S. and North Korea jolted markets around the world, interrupting a stock-market rally fueled by corporate earnings and global economic growth. Declines in the U.S. came during what has been a placid stretch for markets. Wall Street's losses began Tuesday after President Donald Trump warned Pyongyang against making more threats, saying it faces ' fire and fury like the world has never seen." North Korea responded that it was considering firing missiles at Guam. The Dow Jones Industrial Average was recently down 73 points, or 0.3%, at 22012. The S&P 500 declined 0.3% and the Nasdaq Composite shed 0.6%. Corners of the market that tend to benefit from flare-ups of geopolitical risk were the bright spots amid Wednesday's declines. The CBOE Volatility Index, known as Wall Street's "fear gauge," jumped more than 11% to 12.17, on pace for its highest close in more than a month. U.S. defence stocks rallied. Defence shares also rose in April after the U.S. launched cruise missiles at a Syrian air base. The U.S. gold price gained overnight, adding 1.3% to finish at 1,276.90 US$/oz.
Stocks across Europe closed sharply lower Wednesday as tensions between the U.S. and North Korea escalated. In Frankfurt, the DAX 30 dropped 1.1% to 12,154.00, and in Paris, the CAC 40 index fell 1.4% to 5,145.70. Those marked the worst sessions for those benchmarks since July 21, FactSet data showed. Those moves left the Stoxx Europe 600 down by 0.7% to 379.84, with only the utilities sector, considered defensive, notching a small gain at the close. Bank shares were hit hard Wednesday and that pulled the Stoxx Europe 600 Bank Index down 1.4%, the biggest decline in three weeks and the first loss in five sessions.
Asian markets were also pressured Wednesday by rising tensions between the U.S. and North Korea. South Korea's benchmark Kospi index closed down 1.1%. Samsung Electronics, which makes up more than 20% of the index, fell 3%. The Korean won fell 0.9% against the dollar. Japan's Nikkei Stock Average tumbled 1.3%, its largest decline since mid-May, also weighed down by the yen's appreciation against the dollar. Elsewhere, Chinese stocks were little changed as July inflation data met analysts' expectations.
After having fallen in 4 of the prior 5 sessions, Australia stocks showed resolve today in the face of regional weakness brought on by renewed worry about North Korea. Helping was a successful start to big-bank earnings season courtesy of Commonwealth Bank. That followed a volatile few sessions for the country's biggest lender as it faces allegations of a compliance failure that left it open to money laundering. The S&P/ASX 200 rose 0.4% to 5765.7 with the Big 4 banks making up nearly half the gain.
The London Metal Exchange's three-month copper contract closed lower overnight, closing down 0.4% at $6,455/t. The other base metals finished mixed. Aluminium prices traded slightly higher, rising 0.1% to 2,019/t. Nickel prices rose a further 1.2% overnight to 10,718/t, whilst zinc prices added 0.1% to finish at 2,920/t. Lead prices traded lower, losiing 1.4% to 2,329/t. Tin prices clawed back some ground overnight, firming 0.1% to 20,295/t.
In this Issue
Industrials | Results preview
The attached notes summarise our thoughts and financial forecasts leading into the reporting season.
Mining Services | Great expectations
Markets are expecting big things from mining services companies this reporting season. With good reason; a number of companies in this space are likely to demonstrate solid momentum into FY18. However, whether performance will be strong enough to support recent share price gains is not as clear, and we are finding it difficult identifying value in the stocks we cover. We feel anything other than outperformance may disappoint. From an operational point of view we like both ASL and ANG; they will very likely post solid results and indicate good growth in FY18. However, from a valuation perspective we think this is already reflected in share prices. PEA is a reliable performer, but the emerging competition in this space gives us pause. We would still avoid MCE; it will take time to diversify away from offshore drilling. GNG is currently the best investment option – FY18 will be a record year and, on our numbers, will support a dividend yielding >7%.
Small Caps | Something for everyone
Small caps (ex-mining services) under coverage offer exposure to attractive sectors. GCS and SXE have significantly increased their presence on the construction-rich east coast. PGC sells products and services into the acute and aged healthcare space. PPC has a large, low-cost, country-wide property development portfolio focused on growth corridors. ASB should benefit from increasing naval spend, and TOX has exposure to the defensive waste management sector. We think there is more value apparent in GCS, PGC and PPC, while ASB, SXE and TOX are closer to our valuations.
Micro Caps | Patience needed
One thing common to our microcap universe is that investors need to look beyond near term financial performance to appreciate the potential. However we expect investors to selectively do so, particularly given the capital flowing into the microcap space. Our picks in our universe are currently CLX and GRB. For logistics business CLX, we believe FY17 will prove to be the trough year and that mid-cycle earnings support a higher share price. And brewer GRB is successfully executing to date its strategy to sell more proprietary product. We are upbeat on the potential for OEC’s drone business, but worry about timing and the drag from REMSAFE in the near term. TPS and VLT are still in the process of proving their business models. The former turned the corner in the latest quarter, but both are still close enough to our valuations to warrant hold calls.
Note: we exclude from this preview earlier stage companies under coverage for which we do not have financial forecasts (AMN, BOT, HZR, OBJ, OCC and SO4).
Important Disclosures:
Pacific Energy (PEA): Argonaut acts as Financial Adviser to PEA and receives fees commensurate with this service.
CTI Logistics (CLX): Argonaut acted as Lead Manager to the Capital Raising of $2.4M in May 2017 and will receive fees commensurate with this service.
Gage Roads (GRB): Argonaut acted as the Lead Manager & Underwriter to the Placement & Entitlement Offer to raise $10.1M in August 2016 and received fees commensurate with this service. Argonaut holds or controls 15M GRB Options exercisable at $0.07 on or before 14 October 2019.
Threat Protect (TPS): Argonaut has acted as Financial Adviser to TPS in the previous 12 months. Argonaut currently owns and/or controls 20M TPS options exercisable at $0.025 on or before 1 September 2018.
Vault (VLT): Argonaut participated in the Placement to raise $1.5M in April 2017 and will receive fees commensurate with this service. Argonaut currently owns and/or controls 2.55M VLT shares and 23.92M VLT options exercisable at $0.025 on or before 1 July 2019.
Recent Contacts & Presentations
Rift Valley Resources Ltd (RVY), Panoramic Resources Ltd (PAN), Doray Minerals Ltd (DRM), Wellard Limited (WLD), Bryah Resources Ltd (BYH), Auris Minerals Ltd (AUR), Gage Roads Brewing Co Ltd (GRB), Stavely Minerals Ltd (SVY), Orbital Corporation Ltd (OEC), 4DS Memory Ltd (4DS), Kin Mining NL (KIN), Pharmaust Limited (PAA), Botanix Pharmaceuticals Ltd (BOT), Dimerix Ltd (DXB), Metro Mining Ltd (MMI), Paringa Resources Ltd (PNL), Independence Group NL (IGO), MZI Resources Ltd (MZI), Transerv Energy Ltd (TSV), Emmerson Resources Ltd (ERM), Antipa Minerals Ltd (AZY), Echo Resources Ltd (EAR), Sovereign Metals Ltd (SVM)
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