Unum Capital: Research Note 04-Nov-2019

Unum Capital: Research Note 04-Nov-2019

Market Commentary:

On Friday, the JSE closed at a six week high, driven by gains in large cap diversified miners, as well as Bidvest, Vodacom and PGM producer Implats. On a macro level, payrolls data out of the US reflected an economy that continues to produce jobs with a 128,000 gain versus consensus expectations of 89,000. This data comes two days after the Federal Reserve cut interest rates for the third time this year on fears that the economy may be slowing. Locally, the Rand closed above 15 to the US Dollar as investors awaited the outcome of the announcement by rating’s agency Moody’s which was due after 11pm on Friday evening. The announcement saw the agency maintain the country’s credit rating at Baa3 while downgrading the outlook from ‘Stable’ to ‘Negative’.

An extract from the statement reads as follows:

“Moody’s decision to change the outlook to negative from stable reflects the material risk that the government will not succeed in arresting the deterioration of its finances through a revival in economic growth and fiscal consolidation measures. The challenges the government faces are evident in the continued deterioration in South Africa’s trend in growth and public debt burden, despite ongoing policy responses.

While high unemployment, income inequality and the social and political challenges they imply for policymakers are long-standing features in South Africa, the obstacles that they pose to the government’s plans to raise potential growth and contain fiscal deficits are proving more severe than expected a year ago. Acute financial stress for state-owned enterprises (SOEs), in particular Eskom Holdings SOC Limited (Eskom, B2 negative), continues to require sizeable ongoing support from the government. The development of a credible fiscal strategy to contain the rise in debt, including in the 2020 budget process and statement, will be crucial to sustain the rating at its current level.

The Baa3 rating affirmation takes into account the country’s deep, stable financial sector and robust macroeconomic policy framework, set against ongoing challenges related to weak potential growth and strong fiscal pressures.”

Additional comments from the statement included:

“Socio-economic features in South Africa including structurally high unemployment and income and wealth inequality are longstanding and deeply-entrenched constraints on the country’s growth potential. Deep inequalities — South Africa’s income inequality is among the highest globally, as measured by the Gini index — and resistance to reforms from key stakeholders limit the government’s room to adopt and implement structural reforms.”

“In the last two years, it has become increasingly apparent that those constraints are challenging the government’s ability to implement reforms that would durably lift growth, to an even greater extent than previously expected. Moody’s has revised down its medium-term growth projections to 1-1.5%, barely in line with population growth, from earlier expectations of a gradual pick-up towards 2.5-3%.

Job creation remains a central problem, with unemployment at a multi-year high of 29% in the third quarter of 2019. Gross fixed capital formation has been contracting on a year-on-year basis since the second quarter of 2018, as private companies see limited prospects of an improvement in the business environment. Productivity, the level of output per worker, has remained stagnant, in contrast with the steady, even if sometimes limited, growth seen in other countries at similar income levels.”

European Stocks Up on Strong Data (Close of 01 Nov 2019): European stock markets closed in the green on Friday, boosted by better-than-expected US jobs report and stronger-than-expected Chinese manufacturing PMI. Job creation in the US increased by 128 thousand while markets were expecting a smaller 89 thousand gain and wages returned to growth while the Caixin China General manufacturing PMI came in at 51.7, the fastest expansion in near three years, and beating expectations of 51.0. The DAX 30 gained 94 points, or 0.7% to 12,961, the highest since June 15th 2018; the FTSE 100 added 54 points, or 0.8% to 7,302; the CAC 40 rose 32 points, or 0.6% to 5,762; the FTSE MIB rose 241 points, or 1.1% to 22,934, the highest since May 22nd 2018; and the IBEX 35 went up 71 points, or 0.8% to 9,328. TradingEconomics.com

US Stocks Rally on Upbeat Macro Data (Close of 01 Nov 2019): Wall Street closed deeply in the green on Friday with the S&P 500 and Nasdaq booking fresh highs, as October employment numbers topped expectations with 128 thousand jobs added in the month and 75 thousand gained in revisions. On the trade front, US-China news were offset by USMCA updates, as House Speaker Nancy Pelosi told Bloomberg that she sees a vote when ready and called it the “easiest trade deal.” Abroad, the Caixin China manufacturing PMI climbed to a 32-month high of 51.7 in October from 51.4 in September. Chinese ADRs rallied on Friday led by YY, Baidu, Bili, and Tencent. The Dow Jones added 301 points or 1.1%. The S&P 500 gained 29 points or 1.0%. The Nasdaq climbed 94 points or 1.1%.- TradingEconomics.com

Asia: This morning, Asian equities are in positive territory. The Nikkei is closed as Japan celebrates Culture Day. Tencent is higher by 1.18%. BHP is +2.07%.

On the ASX, movers include:

Indices | JSE Top 40, S&P500 Futures

JSE: The downward trend line going back to the 24 June peak has been tested and breached. The next potential short term resistance level is 50879, which is also the prior breakdown level seen on 17 September. On the downside, the 49699 level is now becoming a short term support zone.

S&P500 E-Mini Futures: The index has broken above the 3017/3020 level. It is possible that we see a re-test of the gradually downward trending overhead resistance level at around 3007. For bulls to remain positive, this level should turn to support and hold while bears would monitor for a false breakout. Daily RSI indicator remains within the bull zone with a 66 print.

FX | USD/ZAR, GBP/ZAR

USDZAR: In early Monday trade, the Rand trades at 14.83, having opened at 14.87. This gap has seen the price trade below the 50-day moving average but above an upward trending 200-day moving average. On the downside, support is 14.64 and 14.56 while resistance is 14.99.

This can be seen on the daily chart below:

A look at the monthly chart of USDZAR reflects a long term bull channel remaining in place, with the MACD technical indicator supporting the latest long term leg higher (triggered in June 2018).

GBPZAR: The weekly chart sees the pair looking to retest the breakout level. On the upside,  R19.78 is a resistance level which if it is breached, opens up 20.45 to 20.60.

Sectors | JSE Major Sector Analysis Metrics, Moving Average Trend & Quick Take

(source: timbukone / TradingView.com Chart Data)

Sectors | United States Major Sector Metrics

(source: SPDR, TradingView.com Chart Data)

Single Stocks | Short and Medium Term Active Opportunities/Levels (JSE)

ARI | African Rainbow Minerals: Price has developed a head and shoulder technical formation where the most recent short term leg higher has seen the price being rejected at the neckline of the head and shoulder while also developing a bear flag formation. Conventionally, aggressive traders could look to short at current levels while a more conservative approach would be to wait for the bear flag to break lower as a trigger for further downside.

DSY | Discovery | The share has spent the last three weeks of October grappling with the 125/127 level. The downward trend line resistance level has held while the share has broken below the incline support going back to 20 August 2019. The daily chart’s Relative Strength Index has broken back into the bear zone, signaling a return to short term weakness.

OMU | Old Mutual | The price action for the share has reflected a push-back by the bears. On Friday we saw a bearish engulfing candle being formed with the price threatening to break below support going back to 23 September. A break below this level opens up 1828c to 1805c as targets.

CLS | Clicks | Following a sharp move higher on 07-October, buying pressure on the the share is starting to wane, with the sideways direction being in play since the last surge higher. On Thursday and Friday we saw the price break lower from a bear flag formation with the 250ooc level being an active selling zone. A loss of 243 opens up 23650c as a target zone.

CPI | Capitec Bank | Increased volatility at the prior breakdown level. Wider ranges for the daily candle, signals an increased battle between buyers and seller. RSI negative divergence – an early signal that the potential for a directional change has increased.

ASR | Assore | Despite recently trading in a range, the underlying indicators suggest that the share is attempting to reverse it’s downward trend:

  1. Bullish RSI divergence
  2. RSI having breached it’s bear trend.

Dis-chem Pharmacies (Update): Readers of our research will recall our warning on DCP at 3415c on 05 March 2018. On Friday after the market close on Friday, the company issued a profit warning, indicating that Headline Earnings Per Share would be lower by up to 39.5%. At the time (March 2018), our concern was the excessive valuation in the midst of a lackluster South African economy which included high unemployment and an under pressure consumer.
By way of this example, we see the value of integrating technical and fundamental analysis.
Dis-Chem Pharmacies Chart As At 05 March 2018 at R34.15.
Single Stocks | Short Term Active Opportunities/Levels (Offshore)
AVTI |Activision Blizzard | Previous long recommendation. Stock setting up for a new leg higher with cup and handle technical formation, looking to close “gap” at $62.35.
BIDU | Baidu Inc | Bullish divergence as per RSI. Price confirmation is a preferably strong price action at the downward trend line.
TWTR | Twitter Inc | 14 PE, Positive Free Cash Flow, Sticky User Base and Short Term Oversold- Buy!
AXP | American Express | The share is reversing it’s short to medium term downward trend, with a rising 200-day acting as a support level. RSI shifting back into it’s bull zone (+50). Something to note: this share is cheaper than it’s peers (Visa and Mastercard).
Commodities Technicals | Rand/Platinum Price vs Rand Gold, Natural Gas
The Rand/Platinum Price is looking to breach it’s bear trend versus Rand/Gold Price with higher lows having been made and a strong move as per the weekly chart.
Natural Gas: Price has cleared an 11-month trend line as well as the 200-day moving average which previously served as a resistance zone.  The RSI is displaying bull characteristics s it trades in the +50 zone following a long term compression. It should also be noted that the 50-day MA is starting to rise. A pullback sub-$2.48 is worth a look for traders who missed the run-up from the previous recommend entry of $2.10.
Trading Statistics | JSE (Relative Strength, Volume, Price vs 1 & 3-month highs/lows)
Price vs 1-month highs and lows
Trading Statistics | Offshore (Relative Strength, Volume, Price vs 1 & 3-month highs/lows)
The Week Ahead | 

This week important releases include the US ISM Non-Manufacturing PMI, trade deficit, Michigan’s consumer sentiment, and factory orders; UK Markit Services and Construction PMIs; Eurozone retail sales; Germany factory orders and trade balance; China foreign trade, consumer and producer prices; and Australia retail sales and trade balance. The BoE and RBA will decide on monetary policy, while the BoJ will publish meeting minutes.

In the US, the ISM Non-Manufacturing PMI is expected to rebound from a three-year low, pointing to an acceleration in services activity during October; while the September’s trade deficit is seen narrowing from the previous month. The preliminary reading of Michigan’s consumer sentiment should point to an improvement in morale during November. Other notable publications are: factory orders; JOLTs Job Openings; IBD/TIPP Economic Optimism; third-quarter nonfarm productivity and labor costs; and the final readings of wholesale inventories and Markit Services PMI.
Elsewhere in America, important releases include: Canada employment figures, foreign trade, Ivey PMI; and Mexico and Brazil inflation rates.
In the UK, the Bank of England will meet to deliver its latest policy decision and to publish its Inflation Report with updated forecasts. Policymakers are widely expected to keep policy on hold while investors await to see whether or not the central bank switches to a dovish stance amid a Brexit deadlock and ongoing political uncertainty. On the economic data front, Markit PMIs are set to point to further contraction in both services and construction sectors during October.
Elsewhere in Europe, the Eurozone, Germany and France will publish final estimates of Markit PMIs while Spain and Italy will release flash readings. Other important releases include: Eurozone and Italy retail sales; Germany factory orders, industrial production, and trade balance; France industrial output and foreign trade; Switzerland consumer confidence and jobless rate; and Turkey inflation rate.
In the Asia-Pacific region, China‘s trade figures will be keenly watched, with markets expecting a 3.5 percent drop in exports and an 8.9 percent slump in imports amid ongoing trade tensions with the US. The country will also be publishing Caixin Services PMI and consumer and producer prices. Inflation will probably hit its highest level since February 2013, while producer prices should fall further into deflationary territory. Meanwhile, the Reserve Bank of Australia is likely to hold interest rates at record lows while the Bank of Japan is set to release its monetary policy meeting minutes. Australia’s retail sales, trade balance and AIG Services Index will also be in the spotlight.
Other highlights include: New Zealand third-quarter unemployment; Indonesia and the Philippines Q3 GDP growth rates; and Malaysia and Thailand interest rate decisions.

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