Market Update & Important Indicators
U.S. stocks headed sharply lower Wednesday after two consecutive sessions of gains, as negotiations between Greece and its creditors hit a snag. The S&P 500 fell 12 points, or 0.6 %, to 2,111. The Dow Jones Industrial Average dropped 145 points, or 0.8 %, to 17,999. The Nasdaq Composite fell 31 points, or 0.6% at 5,128, retreating from its record high reached Tuesday. Ahead of the opening bell, market reaction to a government report showing the U.S. economy contracted by 0.2 % in the first quarter, was muted as data was in line with the market's expectations. Jim Paulsen, chief investment strategist at Wells Capital Management, noted that while Greece headlines are moving markets, the moves are less and less significant. "The revision to GDP data is a look in rear-view mirror. Also, investors know there is a seasonality problem with calculating first-quarter data," Paulsen said. "At this point, stock traders are watching the bond markets carefully, as changes in yields, which can happen rapidly, will affect stock prices," he said. Government bonds rallied as investors sought safety of havens on Wednesday. 10-year Treasury yield , which moves inversely to prices dropped 3 basis point to 2.38%. Negotiations continued on Wednesday, with Greek Prime Minister Alexis Tsipras repairing to meet lenders in Brussels. Media reports said Tsipras had told his government the creditors haven't accepted Greece's latest reform proposal, adding pressure on European stocks as well as U.S. stock futures. Eurozone finance ministers are scheduled to hold a Eurogroup meeting on Greece at 7 p.m. Brussels time, or 1 p.m. Eastern Time.
European stocks fell on Wednesday as some of the recent optimism surrounding Greece's debt negotiations with its creditors faded slightly. Significant divisions remain between Greece and its international creditors over measures Athens must implement before receiving desperately needed bailout aid, according to a document from the Greek government seen by The Wall Street Journal on Wednesday ahead of a crucial meeting of eurozone finance ministers. Philip Lawlor, a partner at London-based Smith & Williamson Investment, said that despite what looks to be a small setback in negotiations, he is not concerned and said "things are heading in the right direction." "Both sides still don't want to be seen as giving in, but if this marked a real breakdown in negotiations, then the market reaction would be a lot more severe," he said. A summit of European leaders on Thursday and Friday could be the final chance to find a solution if Wednesday's meeting fails. David Vickers, a senior portfolio manager at Russell Investments, which has around $272 billion in assets under management, said that the latest developments serve as a reminder that there is "a long way still to go and hurdles to surmount before a deal [is] agreed." Nonetheless, he added that the market still seems to think that a deal will be done. Alberto Gallo, head of macro credit research at Royal Bank of Scotland Group, said that he still thinks the most likely outcome is that a deal over an extension of bailout funds will be reached. Such a deal is likely to be short term, he said, and in the longer term negotiation on debt relief will continue.
The Tokyo Stock Exchange Mothers index of startup companies rose to a new year-high following a Nikkei business daily report saying that the operator of the index, Japan Exchange Group, will allow futures index trading in mid-2016. In China, the Shanghai benchmark built on Tuesday's 2% gain. Analysts said capital that had been locked up to potentially subscribe for coming initial public offerings flowed back into existing shares, helping improve liquidity. The market was recovering after a volatile session Tuesday where analysts said margin calls–when brokerages ask investors to add more money to cover loans to buy stocks–caused the benchmark to plunge nearly 5% intraday. In the event that investors don't add more collateral and the market falls further, the brokerage can sell down investors' existing holdings automatically. Total margin loans–which have helped Shanghai stocks rally to seven-year highs earlier this month–were at 2.25 trillion yuan Tuesday, slightly off from a record 2.273 trillion last Thursday, according to data provider WIND Info. Dairy company China Mengniu Dairy Co. Ltd. was down 5.8% in Hong Kong on news of a milk power recall. China's Food and Drug Administration asked three local milk producers–Shaanxi Guanshan Dairy Co. Ltd., Xi'an Guanshan Dairy Co. Ltd. And Shengtang Industry Co. Ltd. to recall their milk powder products after finding excessive levels of chemicals in some batches.
Australia's equities market eked out a slight gain Wednesday as shares largely treaded water following a sharp rise the day before. Modest gains in U.S. stocks in overnight trading, helped by continued optimism Greece was nearing a bailout deal with its creditors, set the tone for the local market. "It's been a case of steady as she goes for the Australian stock market," said Will Leys, a sales trader at CMC Markets in Sydney. However, he added the calm might not last if signs emerge that a resolution to Greece's debt crisis isn't as on course as financial markets have been anticipating. "Markets have largely priced it in as a done deal, so any spanner in the works could trigger some sharp and rapid price adjustments," Mr. Leys said. The steady recovery in financial shares seen in recent days continued, with Australia & New Zealand Banking adding 0.6% and Commonwealth Bank gaining 0.5%. Shares in workforce provider Skilled Group climbed 7.1% after it said it had accepted a sweetened 652.4 million Australian dollar (US$504.8 million) takeover bid from rival Programmed Maintenance Services. Flight Centre slipped another 8.8%, adding to a 14% drop Tuesday after the travel agency warned its earnings for the year through June would be lower than previously forecast thanks to slower-than-normal sales growth and discounting.
Brent fell 0.96% to US$63.49/bbl. Metals on the LME were down across the board with Tin, Nickel & Copper posting the biggest losses, Tin down 1.2% with Nickel and Copper down 0.7%. Gold was down 0.3% to US$1175/oz. Iron ore fines rose 1.9% to US$62.53/t.
In This Issue
CTI Logistics (CLX) | BUY
The recently announced acquisition of GMK Logistics is a well-flagged and logical move that provides CLX with exposure to the east coast. The largely debt-funded $27m acquisition was made on a 4.5x EBITDA multiple, and increases our FY16 EPS forecast by 28% to 15.1cps. The Company has the option to reduce the growing net debt position (gearing >50% post acquisition) via property sales. We expect the acquisition will prove to be a well-reasoned strategic move by an experienced management team. Our valuation increases to $2.10 (prior $1.75) and our buy call is maintained.
Gold Road (GOR) | SPEC BUY
Gold Road (GOR) delivered further positive drilling results from Gruyere, with most holes intersecting similar or better tenor mineralisation compared to the Resource model. Importantly, higher grade, wide mineralisation was intersected at depth outside the existing Resource envelope. The results highlight the potential for a bulk tonnage, underground operation at Gruyere and the likelihood for further Resource expansion. An updated Resource model is expected in the coming months, incorporating these results. Gruyere’s scale, geometry, long life, and favourable metallurgical properties, combined with a low sovereign risk jurisdiction, will ensure the asset attracts market and corporate attention. Following the recent capital raising, GOR is well funded (est ~A$50m cash) to the completion of a BFS and to continue its high intensity exploration programs. SPEC BUY and A$0.75 valuation maintained.
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Northern Star (NST), Sandfire (SFR), Western Areas (WSA), Panoramic Resources (PAN), Regis (RRL), Kingsrose (KRM), Medusa (MML), Pacific Energy (PEA), Orbital (OEC), Peet (PPC), Alexium (AJX), Austal (ASB), Empired (EPD), Rewardle (RXH), Saracen (SAR), Sino Gas & Energy (SEH), Dacian (DCN), Buru Energy (BRU), Carnarvon Energy (CVN), Otto Energy (OEL), Empire Oil & Gas (EGO), Pura Vida Energy NL (PVD), High Peak Royalties (HPR), Carnarvon Petroleum (CVR)