US Earnings Impress | A2 Milk Soars

15 October 2021

Global markets jumped overnight, with the US market (S&P 500 index +1.7%) experiencing its largest single day jump since March, as better-than-estimated corporate earnings and economic data outweighed fears that inflation pressures and supply-chain blockages could crimp growth.

All sectors traded higher, led by materials and tech stocks, with the latter benefiting from a slight dip in US 10-year Treasury yields. A lower-than-anticipated number of weekly jobless claims came in at 293,000 which added to the positive market sentiment – the first time the tally has fallen below the 300,000 level during the pandemic-era.

Of the 8 companies in the S&P 500 that reported overnight, all beat earnings expectations, despite citing labour and other cost inflation, with robust sales growth the leading factor driving earnings beats. Bank of America, Morgan Stanley and Citigroup saw their shares rise 4.5%, 2.5% and 0.8% respectively, after beating earnings expectations, while Wells Fargo shares declined -1.6% despite an earnings beat.

European Markets (Stoxx 600 index +1.2%) were also up overnight, as all sectors traded in the green.

A2 Milk (:NZX / A2M:ASX)

A2 Milk shares have surged +19% over the last 3 days, following hopes of a turnaround in revenue in-line with the experience of its rival Bubs Australia which has seen a significant pick-up in sales of infant formula products in China. 

Its believed short sellers were under pressure and had to close positions, especially as the recent surge would mean A2 Milk would continue to be included in the MSCI Standard Index – if A2 exits the index, it would cause index tracking funds to sell 50m shares, or approx. 40x its average daily volume.

While still profitable with plenty of cash on hand and a strong brand (China brand health metrics remain positive) – the stock offers value, potentially for an interested takeover party such as Nestle. 
However, at the current juncture and given the balance if risks we remain HOLD rated due to the near-term challenges and no guidance from management for a clear turnaround plan.


Australia & New Zealand Market Movers

The Australian market was up yesterday (ASX 200 index +0.5%) for the first time this week, following an upbeat lead from Wall Street.

The Australian economy lost 138,000 jobs over the month of September which was largely overlooked given their two largest states were in lockdown and investors focused on rebound in activity following NSW easing restrictions this week.

Tech shares were favoured as the best performing sector, as investors looked to pick them up from their recent sell down and most immune to inflationary pressure. Followed by gains from materials and Healthcare stocks which did well.

Most shares were trading higher, while energy sector gave back some gains, with financials being the only other sector that was down.

The New Zealand market was up again on Thursday (NZX 50 index, +0.2%).
A2 Milk and Synlait were the two best performing stocks, which helped a lift the index up on another choppy session.

A surge in covid cases caused healthcare stocks to rise EBOS (+1%), Green Cross Healthcare (+1.6%) Fisher and Paykel Healthcare (+0.6%). While property and yield stocks both sensitive to a rise in interest rates fell, following earlier tapering of Bond buying from the Fed Mercury (-2.4%), Meridian (-2.2%), Kiwi Property Group (-1.7%), Contact (-1%), Spark (-0.6%).

3 Things Markets will be Watching this Week

  1. Key events this week include CPI (inflation) data from the US and China.
  2. ​US Third quarter earnings season commences, with the major US Banks set to report this week
  3. Locally, Employment data in Australia is due and Business Confidence in New Zealand
Of the 8 companies in the S&P 500 that reported overnight, all beat earnings expectations.

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