Global markets went into free-fall overnight (S&P 500 Index -3.5%) as markets deal with a second wave of COVID-19 across Europe and the US.
In Europe, lockdown measures have been reintroduced in France and Germany. The Stoxx 600 European market index fell to a 5-month low, losing -3% as German Chancellor Angela Merkel reached a deal for a one-month partial lockdown to curb the spread of the virus. Auto and financial shares saw some of the steepest declines in Europe.
Earnings announcements didn’t help sentiment, as Microsoft was among the biggest drags on the S&P 500 as investors focused on revenue guidance which was below expectations. Even as quarterly results surpassed analysts targets. Mastercard shares tanked as it missed expectations on both top and bottom line estimates. Boeing slumped to a one-month low as it announced plans for more job cuts. On the flipside, General Electric gained after reporting a surprise profit. Any signs of weakness in earnings is being met by stock selloffs. Compared to last quarter, expectations are a lot higher and investors are more positively positioned than they were earlier in the year – making the bar to outperform higher.
Next week’s US election is also no doubt playing a role in making investors cautious.
Genesis Energy (GNE:NZX / GNE:ASX)
Genesis Energy (GNE) shares have traded higher since our last report, as it released its result and quarterly update and earnings result. More importantly, news-flow around Tiwai point has overshadowed earnings and has been the more important share price driver for the sector in recent times.
The NZ power generator sector had taken hit after Rio Tinto gave Meridian notice to terminate the Tiwai Point southland smelter’s power contract when it expires at the end of August next year – the smelter uses almost 14% of NZ's power generation. The Government have now pledged to keep Tiwai running for 3-5 years and we assume a 75% chance of a delayed exit from June 2025. Prime Minister Jacinda Ardern said she would offer Rio Tinto a discounted transmission price to keep the Tiwai Point aluminium smelter open, allowing power generators time to adjust power supplies, with the condition of the cheap power to be to protect jobs at the smelter.
The certainty created by this and rebound in electricity prices will mean Genesis has excess cashflow to fund its dividends. While no official agreement has been reached, the chances of a deal being struck feel high.
In terms of an operational update there have been more positives than negatives, as retail performance was strong with headline pricing up across all fuels sold, offset by some lost volume in the competitive business space. Generation was up 13% on the prior period, largely driven by higher coal usage, where the cost of its imported fuel has fallen 14%.
We considered downgrading our rating on GNE back to a HOLD, but GNE’s dividend yield of close to 5% is attractive for income seeking investors given the current low interest rate backdrop, and hence we remain BUY rated for now.
Australia & New Zealand Market Movers
The Australian market was a touch higher yesterday (ASX 200 Index +0.1%) to notch its first gain in 5 trading sessions.
Technology was the best performing sector after a quarterly update from Afterpay pushed the payments company to a record close of $102.97, or 7.3% above where it ended trade on Tuesday as its 1st quarter underlying sales more than doubled. A quarterly update also lifted Coles shares, as it delivered Supermarket like for like sales growth of 9.7% in the 1st quarter of 2021.
The New Zealand market was basically flat on Wednesday (NZX 50 Index +0.1%) as a bounce for Fisher & Paykel Healthcare helped support the market. A resurgence of covid-19 in the United States and Europe weighed on some stocks, but for Fisher & Paykel Healthcare benefits their business.
In stock news, Kiwi Property Group announced a revaluation gain of +$9.2m to $3.2bn based on independent valuations as at 30 September 2020. A solid gain in office values (+$38.9m) was partially offset by retail (-$29.7m). QEX Logistics shares went into free-fall as it advised that an estimated NZ$4 million of inventory has been removed from its secured China Custom’s bonded warehouse without the Company’s authorisation.
3 Things Markets Will be Watching this Week
- COVID-19 news is back at the top of headlines with record case numbers across the US and Europe. In Europe investors are watching for signs of the impact on economic activity as social distancing measures are re-introduced.
- It is set to be a huge week of corporate earnings ahead with 189 S&P 500 companies due to report. Key names reporting include: Apple, Microsoft, Amazon, Alphabet, Facebook, Twitter, Vale SA, Exxon Mobil, Chevron, Pfizer, Merck, Gilead, UPS, Caterpillar and General Electric.
- We are one week out from the US election, with betting markets having Biden as a 65% favourite to win.