Global markets were higher overnight as retail and technology stocks led Wall Street back to positive territory and the small-cap Russell 2000 hit a new intra-day high.
A strong result from retailer Macy’s helped support the retail sector, as Macy's results came a day after strong April retail sales data showed consumer spending was picking up, stoking inflation worries and sending US government bond yields higher. As we have discussed previously, the pace of interest rate moves higher will be key to driving markets this year, in our view.
Stock in Focus: A2 Milk (:NZ / A2M:AX)
The big news locally was that market darling A2 Milk plummeted -13.7% on the back of a trading update which was clearly not up to market expectations.
A2 Milk announced that group revenue was $NZ660 million, up 63% from the prior corresponding period and that anticipated group revenue is in the range of $NZ900 million to $NZ920 million for the 2018 financial year (below investor consensus expectations of $NZ950 million). A2 Milk said second-half gross margin will stay broadly in line with the first half and expansion plans in the US and China underpin higher marketing costs.
To us the announcement highlights how easy it is to miss lofty market expectations which have seen A2 Milk become the biggest company on the NZX. At face value the numbers look solid, but even a slight miss on expectations has seen a large share price reaction. Interestingly, the stock appears to be very much news driven lately, with share price moves on the back of trading updates and other updates to the market.
We currently have a HOLD recommendation on A2 Milk and are watching price action closely.
Members should look out for a full update on A2 Milk to be released in next week’s weekly report.
Australia & New Zealand Market Movers
The Australian share market was a touch higher on Wednesday (ASX 200 index +0.15%) driven by modest gains from market heavyweights as shares in a2 Milk and Bellamy's fell sharply. BHP Billiton led the market higher, as chief executive Andrew Mackenzie said that a greater proportion of the company's free cash flow would be returned to shareholders in the near future. The company is expected to have received more than $13.4 billion for its US shale assets this year. Myer advanced following the release of its quarterly sales figures. Total sales fell 2.7% in the first 13 weeks of the year, while comparable sales fell 3.1%. Despite uninspiring numbers, the stock price jumped +16%, indicating the market was expecting worse.
The New Zealand market sold off yesterday (NZX 50 index -1.76%) as market index heavyweight A2 Milk disappointed investors with a market update, dragging down partner Synlait Milk. In other news, Fletcher Building said it reached its $750 million equity raising target after selling 20.2 million shares at $6.45 through its retail shortfall bookbuild, at a premium price to the entitlement offer of $4.80 but a discount to the trading price of the shares. Eligible retail shareholders took up about 58% of their entitlements.
3 Things Markets Will be Watching this Week
1. Corporate earnings season rounds up in the US this week.
2. Australian unemployment data is published on Thursday.
3. Minutes from the last Reserve Bank of Australia meeting are released on Tuesday as well as a speech from the assistant RBA governor.
Have a Great Day,
Team
