RBNZ Signals Cuts | Rio Tinto at Risk

27 June 2019

Global markets ​were mixed overnight as investors await developments at this weekend's G20 summit in Japan with expectations that the US & China will resume trade talks.​

Closer to home, the Reserve Bank of NZ kept interest rates on hold as expected and indicated that more easing was likely to be necessary. The dovish tone of the RBNZ's statement suggests the bank may cut earlier than we had initially anticipated. Several economists now expect the bank to cut rates to 1.25% at its next meeting in August.
 

Stock in Focus: Rio Tinto (RIO:ASX)

​​​​​​​​​​​​​​​​​​​​​Rio shares have continued to run propped up by the price of iron ore hitting $108/tonne, up +51% since the start of the year. 

Iron Ore is currently trading at five-year highs after a mining disaster in Brazil cost 60 lives, with expectations that supply could be restricted following strong new regulations and a crack-down on current practices. Since then iron ore prices continued to rally further on further supply shortages coupled with increased demand from China for the commodity. Current iron ore prices do not appear to be sustainable at these levels in our view. 

More recently RIO announced a second downgrade to their 2019 iron ore shipment guidance due to operational challenges and a higher proportion of lower grade product being mined. We believe RIO is fully priced at the moment, reflecting the recent surge in the price of iron ore – which is more likely to pull back as demand from China eases and supply starts to ramp back up. 

While management are focused on delivering value to shareholders, RIO’s high sensitivity to the iron ore price does make it a close to pure a play on the price of iron ore.
 
We currently have a HOLD recommendation on RIO.

 
Australia & New Zealand Market Movers

​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​The Australian share market was lower yesterday (ASX 200 index -0.26%) as local investors largely shrugged off a Fed-driven sell-off on Wall Street. Afterpay shares rose after promising investors its co-founders Nick Molnar and Anthony Eisen would not sell any more shares until the end of the 2020 financial year. AMP shares advanced despite Slater and Gordon filing a class action against the wealth manager, alleging it charged more than two million customers excessive fees on their super accounts as far back as 2008.

 
The New Zealand market ended its winning streak on Wednesday (NZX 50 index -0.10%) edging lower as investors looked through the details of Fletcher Building's investor briefing in which it confirmed a capital return and noted Australian trading conditions remain tough. The company  unveiled plans to buy back as much as $300 million of stock, affirmed its annual earnings and dividend, and said it doesn't expect to lift its provisioning for the troubled Building + Interiors (commercial construction) division that experienced a cost blow-out in recent years.
 
The NZ stock market will get another boost in August, with Hawke's Bay Regional Council confirming a sell-down of its stake in Napier Port in an initial public offering in July and listing the following month.
 

3 Things Markets Will be Watching this Week

  1. ​​​​​​The ​G20 Meeting takes place on Friday & Saturday.
  2. The Reserve Bank of New Zealand makes an interest rate decision on Wednesday.​
  3. T​here is an OPEC meeting on Tuesday.

Have a Great Day,
 

Team

Closer to home, the Reserve Bank of NZ kept interest rates on hold as expected and indicated that more easing was likely to be necessary.

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