Market Update & Important Indicators
U.S. stocks bounced back on Monday from Friday's steep declines, lifted by upbeat earnings news and an announcement of more stimulus from China. Stocks kicked off the session sharply higher and stuck to a narrow trading range through the afternoon. The Dow Jones Industrial Average rose 209 points, or 1.2%, to 18,035. The S&P 500 added 19 points, or 0.9%, to 2,100. The rebound follows a global selloff Friday fuelled by jitters over Greece's finances and a batch of subpar earnings reports. But an improvement in the earnings picture Monday, coupled with a recovery in many markets overseas, helped propel stocks from their lows. The coming week marks a key period in the first-quarter earnings season, with about 30% of companies in the S&P 500 scheduled to report results.
The Australian dollar sank against the U.S. dollar on Monday after Australia's central bank indicated it could cut interest rates as soon as May's policy meeting. Reserve Bank of Australia Governor Glenn Stevens said at a conference in New York that lower interest rates should square with current low inflation risks in Australia, and consideration for cutting the cash rate "has to be on the table," he said. The Australian dollar slid versus the U.S. currency to US$0.7725 from US$0.7765 before Mr. Stevens' comments and was 0.8% lower for the Americas session. The currency has fallen 5.4% versus the U.S. dollar so far in 2015, after slumping 8.4% last year.
European stocks rose Monday, partially recovering from a fierce selloff at the end of last week, helped by the Chinese central bank announcing plans to stimulate growth. The Stoxx Europe 600 rose 0.7% on the day at just under 407 points. This week, however, Greece is expected to dominate the mood in markets and continue to drive a general hunt for assets deemed to be safest during times of stress, especially German government debt. The yield on the German 10-year bond hit multiple record lows last week and late Monday traded just a shade off its all-time low at around 0.076%.
Stocks in Hong Kong headed for their largest percentage loss this year on Monday, as reassurance from China's government over the weekend failed to keep the market higher. The Hang Seng Index fell 2% to 27,095. Investors in the region were weighing fresh measures from China to counter a slowing domestic economy, including a cut to the amount of reserves Chinese commercial banks are required to hold. The reduction on Sunday was the second of its kind in less than three months and the largest in magnitude since the 2008 financial crisis. Before Monday's losses, the Hang Seng Index had been up 17% year-to-date, with most of the gains coming in April. The Shanghai Composite Index was up 33%, and the mainland's even-riskier stocks in Shenzhen were up 51%, some of the best performing anywhere.
Base metal prices on the LME were largely lower overnight, with copper dropping 1.4%. Gold prices slid Monday after European Central Bank President Mario Draghi reaffirmed that debt-laden Greece won't be forced out of the eurozone. Gold is trading at $1,196/oz. Brent crude was flat at $63.45/bbl.
Thought for the day
The future of local naval shipbuilding – Keeping the IP in-house?
Late last week Austal’s CEO Andrew Bellamy made the point that an Australian prime contractor should manage the Federal Government’s next generation submarine building programme, thereby locking in the local IP to provide support during operations.
These comments were well timed, as on the same day the Government released a comprehensive report (300 pages if you have a few minutes to spare) on the Australian naval ship building industry. It was prepared by RAND Corporation, a leading global defence think-tank, and delivered these key points:
• Australia can sustain a naval ship-building industry by embarking on a longer-term continuous ship-building strategy (that avoids costly production gaps)
• The industry needs significant reform and productivity gains to be competitive internationally (we are apparently 30-40% more expensive than US benchmarks)
The Government will need to decide whether future naval ships will be built and supported locally, or whether ships are simply acquired from foreign shipbuilders. It’s not just the costs to consider, as there are important national sovereign and strategic considerations.
It’s an ambitious programme. At the preliminary stages the Australian Department of Defence (DoD) has indicated the purchase of up to 50 naval vessels from destroyers to patrol boats, worth tens of billions to whoever gets the contracts.
So who could build naval ships in Australia? There are four companies with the capability to do so: ASC Pty Ltd (Adelaide), Austal (Perth), BAE Systems (Adelaide) and Forgacs (Newcastle).
The potential rationalisation of the shipbuilding industry is an important point. RAND’s view is that Australia will find it difficult to support more than one or two naval shipbuilders, implying we have at least two too many. At the same time we also note the debate surrounding the Government-owned ASC: in recent times this has revolved around privatisation and whether it should be involved in Australia’s next submarine build-programme.
Plenty to discuss, and in the meantime the lack of decision making has left a hole in the future naval shipbuilding programme. RAND believes that there will be a gap between the end of current production and the start of a build programme of future frigates. It could be smoothed to a degree by juggling the programme, but the hiatus toward the end of the decade is a looming problem for the industry’s headcount.
The industry will be watching this space with interest. The Government’s views on ASC privatisation are unclear, as is whether the decision will be to build submarines and ships locally or by foreigners. Rationalisation raises further question marks. They’re big decisions – not only for the 2,000 or so full time employees that could potentially be involved in building Australia’s navy for decades to come, but also because of the billions of dollars to be spent. Little wonder Andrew Bellamy has thrown his hat into the ring.
In This Issue
OZ Minerals (OZL) | BUY
OZ Minerals (OZL) released positive March Q results with 31kt copper and 33kz gold in concentrate up 20% and down 9% Q-on-Q respectively. Higher copper production resulted in lower cash costs, falling to US$0.82/lb from US$1.06/lb in the previous Q. (vs Argonaut forecast of 25kt copper and 30koz gold at US$1.10/lb). Accompanying the quarterly were outcomes of the whole business review with the key initiative being an aggressive growth strategy. OZL is less focussed on hunting “unicorns” (rare long life/large scale projects) and has broadened acquisition targets to encompass smaller or distressed assets. In addition, exploration on Carrapateena has ceased and OZL confirmed it has no intention to develop the project without a partner.
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