Global markets were mixed overnight as the US markets stabilised after experiencing losses on Tuesday. The market has been swinging between gains and losses as investors mull the implications of rising US bond yields and as corporate earnings announcements are released.
The yield on 10-year US treasuries moved over 3% overnight for the first time since New Year's Eve 2013, and for just the second time since 2011. As we touched on earlier this week, the pace of interest moves will be a key factor in driving equity market returns this year. The moves have also seen the US dollar continue to strengthen (as higher US interest rates improve the return on US dollar cash) and both the AUD & NZD are now at 4-month lows versus the US dollar.
Markets also continue to digest corporate earnings announcements in the US, and so far 71% of companies which have reported have beaten revenue expectations and 79% have beaten earnings expectations. Overnight Twitter was among the disappointments while shares in Facebook surged after hours on the back of a strong quarterly result.
One sector which should benefit from higher interest rates is the banks, as all else equal higher interest rates improve bank margins (banks can lend at higher interest rates). Bank of Queensland recently released its first half profit figures which we discuss below.
Stock in Focus: Bank of Queensland (BOQ:AX)
Bank of Queensland reported a 4% lift in cash earnings to $182m for the 1st half of 2018 and an 8% increase in statutory net profit after tax to $174m. Its net interest margin (NIM) increased 1 basis point to 1.97%.
This was not a bad set of numbers, however several market commentators are noting the bank faces challenges in terms of competition from micro banks and non-bank financial institutions and the need to remain competitive in a rapidly evolving competitive landscape. Given the recent bad press around the Royal Commission into the practices of the financial sector this has also increased uncertainty around the stock.
We currently have a HOLD recommendation on BOQ.
Members should look out for a full update on BOQ to be released in today’s weekly report.
Australia & New Zealand Market Movers
The Australian share market was higher on Tuesday (ASX 200 index +0.60%) with shares gaining ground as the Australian dollar hovered at a four-month low and inflation remained below the Reserve Bank's target range.
AMP shares continue to experience heavy selling as the wealth manager has come under fire over revelations about its conduct made at a Royal Commission public inquiry into misconduct within the banking and finance industries. Chief executive Craig Meller has quit over the scandals, and AMP could face three shareholder class actions after it admitted to cheating customers and lying to the corporate regulator. Law firms Shine Lawyers, Slater and Gordon and Quinn Emanuel Urquhart & Sullivan are investigating class actions against AMP on behalf of shareholders.
The New Zealand market was lower on Tuesday (NZX 50 index -0.18%) in light trading ahead of the ANZAC day public holiday, with A2 Milk and Synlait Milk continuing to weaken while Fisher and Paykel Healthcare rebounded and Fletcher Building extended gains. Fisher & Paykel has been under some pressure, which was likely relieved by the strengthening US dollar – as the company generates most of its revenue from the US (an increase in the currency improves returns in NZ dollar terms).
3 Things Markets Will be Watching this Week
1. Corporate earnings season in the US will gather pace this week with about one-third of the S&P 500's members scheduled to report in the next five days.
2. Investors will continue to watch fallout from the Hayne royal commission into the financial sector in Australia.
3. The latest Australian inflation data is published on Tuesday.
Have a Great Day,
Team