The Monday Report – 06 April 2020

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This story features DOWNER EDI LIMITED, and other companies.
For more info SHARE ANALYSIS: DOW
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Friday on my Mind

I suggested on Friday morning that Fridays aren’t typically good days in the current environment given the news flow is so rapid at present anything could happen when the market is closed. Best to square up and retreat to the sidelines, especially following a bounce.

The ASX200 opened up around 90 points in the first ten minutes on Friday and then proceeded to track an orderly path downward to close on its low of down around -90 points. The US futures also tracked lower during the afternoon.

It was turn of the industrials sector to play biggest loser, falling -4.6% as the likes of Downer EDI ((DOW)) took a -10% hit. Consumer discretionary fell -4.2%, aided by news new car sales fell -17.9% in March. Even the all-conquering Hilux saw a -21.5% slide.

No surprises car dealer AP Eagers ((APE)) topped the losers’ board with a -12.5% drop while parts distributor Bapcor ((BAP)) chimed in with -9.7%.

The banks (-2.1%) were very much in focus on Friday as bank analysts began to factor in assumed dividend cuts ahead. We are reminded that even before the world had heard of a thing called coronavirus, bank analysts were anticipating a possible trimming of dividends due to the sluggish Australian economy.

Thus now it would seem almost a given but for the moral dilemma. New Zealand has banned bank dividends, meaning the Big Four won’t get their share from NZ branches, but Morrison has said he will not do the same and on Friday, the Commonwealth Bank ((CBA)) CEO, also chairman of the Australian Banking Association, told the media the banks are sufficiently capitalised to continue to pay dividends.

Westpac’s ((WBC)) CEO told the ABC the bank would assess its balance sheet while noting the number of self-funded retirees living on those dividends, with deposit rates as good as zero.

The same reasoning has been applied by the big US banks as (to date) they have agreed between them not to cut dividends.

Harvey Norman ((HVN)) pulled its interim dividend on Friday while Crown Resorts deferred payment for a fortnight and possibly longer if financing arrangements can’t be made.

Flight Centre ((FLT)) and Southern Cross Media ((SXL)) (no sport to cover) are both still in the market for fresh capital while NextDC ((NXT)) succeeded in its similar call to alms.

The energy and materials sectors closed slightly higher on the day, led by (dubious) speculation of oil production cuts on the one hand and defensiveness in iron ore miners on the other. Fortescue Metals ((FMG)) topped the winners’ board with a 5.7% gain.

The dubious production cuts became less dubious on Friday night, sending oil prices up 13%. Saudi Arabia and Russia are supposedly holding a meeting tonight while after the bell on Friday, President Trump told the CEOs of the seven largest US oil companies they will receive help from the government, initially in the form of the previously touted buying of US oil for the country’s Strategic Reserve.

Australian retail sales jumped 0.5% in February, in case you were wondering, but even this does not suggest the economy was in great shape before the lockdown. February was largely a bounce-back from a weak, bushfire-impacted January while December had also been disappointingly weak after a strong November.

Not all companies are suffering at this time. Telco infrastructure company Superloop ((SLC)) reiterated its full year guidance on Friday. That was worth 15%.

Not Working

The same theme was set to apply to Wall Street on Friday night – Friday selling to be safe – and as noted, the US futures were already heading south before the opening bell, and before the March payrolls number.

The US lost -701,000 jobs in March to mark the first monthly fall of any magnitude in almost a decade. Reality bites. And the data are only collected up to mid-month, so April will be much worse than a jump to 4.4% from 3.5% in the unemployment rate would suggest. After ten million Americans filed for unemployment benefits over the previous fortnight, Morgan Stanley forecasts another seven million will have applied last week.

Meanwhile the battle between Morgan Stanley and Goldman Sachs to forecast the most devastating June quarter GDP number continues, with Morgan Stanley now moving to -38%.

American Airlines has shifted its international flight hiatus out to end-August – the northern summer holiday period.

Even Disney has now furloughed employees for the time being – Mickey, Goofy, Donald…

US stock indices did not close on their lows on Friday night. The Dow had been down over -500 points during the session. Volumes were also lower than the average of the prior two weeks.

Notably, the VIX volatility index, which peaked over 90 in March before settling back to a steady 60, is now back at 46. While 40 still historically suggests a very nervous market, nerves are starting to settle somewhat as investors feel a lesser need to secure further downside protection.

Commodities

The only real standout here is oil, with the Saudis and Russia reportedly set to have a chat tonight.

The US dollar has now regained its position as reserve currency, hence the Aussie is back down -1% at US$0.6006.

The SPI Overnight closed up 46 points on Saturday morning, corroborating a Friday shift to the sidelines.

The Week Ahead

I have pointed out that in such circumstances Fridays can be bad. Not this week though. All Western markets are shut on Friday. China is shut today.

The RBA meets tomorrow but has probably used up all its surprises by now. Ditto the minutes of the Fed meeting due on Wednesday night – superseded.

Beyond that, the only non-February data this week will be US weekly jobless claims on the Thursday, along with Michigan Uni’s fortnightly consumer sentiment index.

Bank of Queensland ((BOQ)) reports earnings on Wednesday.

Scentre Group ((SCG)) still has its AGM scheduled for Wednesday and Iluka Resources ((ILU)) for Thursday. Not sure how they pull those off. 

The Australian share market over the past thirty days…

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