Unum Capital: Research Note - MTBPS, USDZAR, General Retailers, AUDJPY, Nikkei 225 and More [31-Oct-2019]

Unum Capital: Research Note - MTBPS, USDZAR, General Retailers, AUDJPY, Nikkei 225 and More [31-Oct-2019]

Market Review 
JSE: It was an eventful Wednesday on local markets with the Medium Term Budget Policy Statement being presented in Parliament by the Finance Minister. The anticipation saw the market participants position themselves ahead of the event with the JSE Top 40 Index experiencing a surge in volatility by mid-morning. Within the first two hours of trade, the index was lower by 1000 points before rallying by 500, with local stock  such as banks and retailers taking the biggest hit. The Rand, which opened the session at 14.61 saw less volatility, testing R14.65 before stabilizing to 14.63 by midday. Unfortunately the currency took a  massive hit as the Minister Mboweni delivered his Medium Term Budget, spiking to 14.91 by the end of the speech. Heading into the US open, Financials and Retailers were lower by over 2%, Telecoms down by 1.9%  while Gold Miners and Platinum shares gained 4.2% and 2.4% respectively. By the end of the session, the All Share Index closed higher by 0.28% as a weaker Rand helped heavy-weight industrial stock gain.
Europe: European Stocks End Mixed on Wednesday: European  stock markets closed mixed on Wednesday, as worse-than-expected bank  earnings results were offset by merger talks and an expected rate cut by  the Federal Reserve. Deutsche Bank missed expectations and reported  losses for the second straight quarter; and Credit Suisse warned about  2020 outlook while Santander’s net profits slumped 75%. Auto makers  stocks were among the best performers, after Fiat Chrysler confirmed  merger talks with Peugeot. Meantime, investors await the Fed to slash  interest rates for the third time this year by 25bps. The DAX 30 dropped  29 points, or 0.2% to 12,910; the FTSE MIB lost 35 points, or 0.2% to  22,646; and the IBEX 35 slumped 116 points, or 1.2% to 9,285; while the  FTSE 100 gained 25 points, or 0.3% to 7,331; and the CAC 40 went up 26  points, or 0.5% to 5,766. – TradingEconomics.com
United States: US Stocks Edge Higher After Rate Cut: Wall  Street traded modestly in the green on Wednesday and rebounded from  early-session losses, as investors weighed the Fed’s decision to cut the  benchmark interest rate by 25 bps for the third time this year. Looking  ahead, market expectations for further easing in December are currently  at 23%, according to CME Group. On the macro side, data showed the US  economy grew at 1.9% in the third quarter of 2019, beating expectations  of 1.6%. Also, US private payrolls climbed by 125 thousand in October,  topping estimates of 100 thousand. On the corporate side, GE beat  analyst expectations and raised its forecasts for 2019 revenue. The Dow  Jones gained 115 points or 0.4%, the S&P 500 10 points or 0.3%, and  the Nasdaq 27 points or 0.3%. TradingEconomics.com

 
Macro | Medium Term Budget Policy Statement (Highlights)
Economic growth is now projected at 0.5% for 2019, as long term growth estimates have fallen. As a result, revenue projections have been sharply reduced. Spending pressures continue to mount, led by the public service wage bill and state-owned companies in crisis. The 2019 MTBPS proposes an approach over the medium term that, effectively implemented, will restore the momentum of economic growth and stabilise the public finances.

Over the next three years, consolidated spending will total R6.3 trillion, with 48 per cent of this amount going towards social grants, education and health. Revenue shortfalls and rising spending pressures are threatening governments’s ability to maintain existing levels of service provision and infrastructure investment.

The consolidated budget deficit averages 6,2% of GDP over the next three years. Debt and debt service costs continue to increase, with the debt-to-GDP ration now estimated at 71.3% in 2022/2023.

Government has clawed back some of the revenue shortfall through reductions to departmental baselines and slower spending growth in 2022/2023. Alone, the reductions are insufficient. Additional measures, particularly on the wage bill, will be required to stabilise the debt outlook and improve the composition of spending. Tax measures are also being considered.

In August 2019, the paper released by the national Treasury outlined short and medium term reforms that can boost economic growth, many of which do not require significant state resources. Interventions to improve the quality of infrastructure planning are beginning to show some results. Further measures to reduce wasteful expenditure, including by limiting claims against the state, will be implemented in the coming year.
Government is providing medium term support to Eskom to secure energy and to honour the state’s contractual obligations. The national Treasury, in partnership with the Department of Public Enterprises, is instituting a series of measures to bring discipline to the utility’s finance, and to step up the timeline for restructuring. Debt relief will only be consolidated once operational efficiencies have been achieved.
Source: National Treasury

Technicals | FX – US Dollar / South African Rand
Taking a look at the currency on a higher time frame i.e. the monthly chart, we continue to see the price trade in a large upward channel as well as a bull flag that has developed from point (A) in August 2011. The long held 14.36 resistance level has bern cleared with the price also having developed an inverse head and shoulder formation since September 2016. The technical indicators show the MACD having made a bullish crossover in June 2018, confirming the most recent long term leg up.
 
Technicals | Sector – JSE General Retailers (J537)
Yesterday’s Medium Term Budget Policy Statement (MTBPS) highlights the challenges that the country faces, at both public and private sector level – where public sector challenges also impede on private sector operational ability as well as confidence. A direct casualty of these challenges is the SA consumer where unemployment is at an 11-year high while private sector credit extension has slowed. Being cognizant of the fundamentals (these shares trade in the low to mid teens on a price-to-earnings basis), the technical chart of the General Retail Index reflects a continued derating of the sector where the price has broken below a long term double top formation while the Relative Strength Index has started to trade in a weakening zone (below 40 as per the monthly chart). Over the medium term, it is tough to see these shares re-rate strongly, from both a technical and fundamental perspective.  
 
FX | Australian Dollar / Japanese Yen | AUD/JPY
Following the prior successful falling wedge breakout, the price is approaching prior breakdown level at 75.39. Traders should be looking at a potential move above 75.60 as an opportunity to short/sell, using a stop-loss of 76.05 and a target of 74.70.

 

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Index | Nikkei 225
The candle structure points to upward momentum starting to wane, creating an opportunity to short the index.
Trading Levels:
Sell the Nikkei 225 at current levels, 22928
Use a stop-loss of: 23220
Take Profit at or near: 22480

Company News:

Imperial Logistics – Trading Update Q1 2020 (SENS Extract)

Performance in line with expectations.

South Africa: persistently weak economic conditions, economic uncertainty and low consumer spending continues to negatively impact  volumes. the division performed well during the three months – supported by new contract gains, retention of CPG ambient contracts that are now operating under more viable commercial terms, and a good performance from Resolve (4PL Solutions), partially offset by lower volumes in the  healthcare business.

Africa:  Trading conditions in this region remain mixed, with variations in  performance across the division. Imres and Eco Health continue to record  good growth.

International:  Notwithstanding the challenging trading environment in Europe, with recessionary conditions in Germany, this division delivered a strong improvement in performance.

Prospects: Based on the first few months of trading, and particularly the challenging market conditions in South Africa and Germany, our outlook for the financial year to 30 June 2020 remains unchanged.

We expect Imperial’s continuing operations (excluding businesses held for sale) to deliver:
– High single digit revenue growth compared to the prior year.
– Low double digit operating profit growth compared to the prior year.
– Low double digit growth in continuing HEPS compared to  the prior year.
– Strong free cash flow conversion.

Trading Statistics | Volume as a % of 10-day average (Top)
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Trading Statistics | Volume as a % of 10-day average (Bottom)

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Trading Statistics | Last Close vs 200-day simple moving average (above)
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Trading Statistics | Last Close vs 200-day simple moving average (below)

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Please chat to the Unum Capital Trading Desk to take advantage of any trading opportunities.
All the best,
Lester Davids
Unum Capital Trading Desk Analyst
e-mail: clientservices@unum.co.za
Tel: 011 384 2923

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