Wall St Jumps, RBA Cuts | A2 Milk Falls

5 June 2019

​​​​​​​​​​​​​​​​​​​Global markets rebounded overnight with US stocks up over +2%, on track to erase losses from a two-day selloff, after Federal Reserve Chair Jerome Powell said the central bank would act “as appropriate” to trade war risks – leaving the door open for a possible rate cut. Adding to positive sentiment, Mexican officials said they expect to avoid Trump administration tariffs, with Mexico’s President saying he hopes to reach a deal with the US before next week’s deadline.
Closer to home, the Reserve Bank of Australia cut the cash rate by 25 basis points (quarter of a per cent) to a record low of 1.25%. This was the first time the RBA has made a move since 2016, and Governor Philip Lowe says it is “not unreasonable” to expect that interest rates will get cut further this year, although no decision has been made. Lower interest rates around the world continue to support equity market returns for the moment.

Stock in Focus: A2 Milk (:NZX / A2M:ASX)

​​​​​​​​​​​​​​​Infant formula companies across Australia & NZ fell heavily yesterday after China' s National Development and Reform Commission released an action plan for the country's infant formula market, aimed at squeezing foreign players out of both ends of the supply chain. The news saw A2 Milk shares take a hit.
According to an action plan released by the NDRC, China is aiming to increase domestic infant formula output. The plan outlines a number of key goals including a 60% self-sufficiency target; encouraging Chinese companies to buy foreign producers and set up production facilities overseas to reduce cost of raw ingredients; tightening regulations on milk-powder imports and online sales platforms; tougher regulation on cross-border ecommerce sales of infant formula; zero tolerance of importing unregistered infant formula; tougher product quality testing; and further consolidation of infant formula producers.
The news is not positive, and highlights business with China & associated regulations are an unavoidable risk for A2. However, A2 is a well-established premium brand in China, and has to date had successful relations in terms of being a leader dealing with the Chinese which we would expect to continue.
We currently have a BUY (High-Risk) recommendation on A2.


Australia & New Zealand Market Movers

The Australian share market (ASX 200 index +0.19%) reversed early losses to end in positive territory on Tuesday. The bank stocks got a boost from the Reserve Bank of Australia meeting expectations when it cut the target cash rate a quarter-point to 1.25%. ANZ Bank announced it would cut its own variable mortgage rates by 18 basis points, while CBA said it would pass on the full cut. Telstra shares rose after the telco announced it would axe a quarter of its contractors over the next two years, meaning 10,000 jobs would disappear. The cut is on top of the 8,000 job cuts to Telstra's permanent staff.
The New Zealand market sold off yesterday (NZX 50 index -1.64%) as the local market caught up with offshore moves and the NZX closed below the 10,000 index level for the first time in a month. Fletcher Building reversed an earlier decline after it said it completed the sale of its Formica unit earlier than expected and lowered its annual earnings guidance.

3 Things Markets Will be Watching this Week

  1. ​​​​    Trade War headlines are likely to dominate investor sentiment.
  2.     The Reserve Bank of Australia makes an interest rate decision on Tuesday.
  3.     Key US manufacturing & employment data is published this week.

Have a Great Day,


Closer to home, the Reserve Bank of Australia cut the cash rate by 25 basis points (quarter of a per cent) to a record low of 1.25%.

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