Global markets were mixed overnight as US stocks fluctuated as investors sifted through a batch of earnings reports. Caterpillar rebounded as its $1bn buyback program offset a profit estimate cut, while Texas Instruments gave a weaker-than-expected forecast, spurring a sell-off in chipmakers.
While it is still early, so far company announcements have generally beaten or been in line with a low bar of market expectations. During corporate earnings season investor attention usually shifts away from broader issues and back to corporate profitability.
Stock in Focus: Meridian Energy (MEL:NZX / MEZ:ASX)
The electricity generator-retailers all fell sharply yesterday after Rio Tinto, which controls New Zealand Aluminium Smelters, said it was reviewing the Tiwai Point smelter's future after rejecting Meridian's proposed pricing. Tiwai Point accounts for about 13% of all NZ’s power usage, so is important in determining supply/demand in the sector.
The smelter secured a $30 million sweetener in 2013 when it strong-armed the then-government during power supply negotiations. Energy Minister Megan Woods yesterday said the government won't provide more financial support.
Meridian chief executive Neil Barclay said the company put forward a number of proposals and concessions to the smelter's owner, but that its offer fell short. He said he was still open to negotiations, and negotiations will likely go through to March 2020. Meridian dropped -8%. Contact was hit even harder, leading the market lower as it fell -9%, while Mercury NZ dropped -8%, Genesis Energy fell -6%, and Trustpower was down -3%. To put things in context, most of the generator stocks are back to levels they were at about a month ago given the recent rally.
It appears Rio Tinto is trying to force its hand, and pressure Meridan to continue to provide cheaper than market rate power. Ironically, if the smelter is closed down, that will benefit Meridian in the longer term, but cause short term pain. Meridian could sell its power onto the grid at much higher price, but this will create market over supply of power in the short term, which would be a significant negative impact on the other power generators.
We do not currently have full research coverage on Meridian.
Australia & New Zealand Market Movers
The Australian market was basically flat yesterday (ASX 200 Index +0.01%), rallying through the session after a weak start to the day's trading.
Westpac announced late in the session that its cash earnings in the second half of 2019 would be cut by around $341 million due to its customer remediation programs.
Lithium stocks dropped across the board on Wednesday after Rio Tinto announced it had found high grades of lithium in rock and tailings waste at its borates business in California's Death Valley. Rio's energy and minerals chief executive Bold Baatar said it had the potential to become America’s largest domestic producer of battery-grade lithium.
The wild ride continued for WiseTech Global, as it gained 8% on returning from a trading halt after denying the claims of a second scathing report from US hedge fund J Capital Research.
The New Zealand market plummeted on Wednesday (NZX 50 Index -2.13%) as Contact Energy, Meridian Energy and the other power companies were sold off sharply on the prospect of the Tiwai Point smelter facing potential closure. Meanwhile, the convention centre fire continued, and the chief executives of both SkyCity & Fletcher Building said it was too early to make any judgements on the extent of the damage and that they were both covered by insurance. Outside the benchmark index, Serko dropped 11% before trading was halted. The dual-listed travel booking software developer said that it was at an advanced stage of finalising a material transaction that included a proposed capital raising.
3 Things Markets Will be Watching this Week
- US earnings season for the 3rd quarter continues this week, and so far company announcements have generally beaten a low bar. Some of the higher profile results will come from Caterpillar, Microsoft, 3M, Amazon and Visa.
- The European Central Bank (ECB) meets this week, although no policy changes are expected given the range of initiatives that were announced in September.
- A number of AGM's and trading update from Australasian companies including Auckland Airport, Metlifecare, ResMed, and Qantas.
Have a Great Day,