Wall Street Stabilises, RBA | Tesla

7 August 2019

Global markets stabilised overnight as US stocks rose about 1% as China stepped in to stabilize the Yuan, soothing concerns that currencies would be the latest weapon in the long-drawn trade war, a day after Wall Street suffered the sharpest one-day percentage drop of the year.

While markets partially recovered overnight, we think the underlying trade tensions between the United States and China are heading down a path of escalation, with no relief any time soon. With tariffs and suspensions of purchases being implemented from both sides, this does not look like a situation where a solution can be implemented overnight to us. As we mentioned yesterday, tensions have clearly escalated and for those who wish to protect against downside moves we think the best option is to allocate a portion of the portfolio to cash.

Closer to home, both the ASX and NZX sold off heavily yesterday, especially tech stocks and those with heavy exposure to China. The Reserve Bank of Australia yesterday did not cut the cash rate, but markets are now implying an almost even chance the Reserve Bank of Australia pulls the rate cut trigger as soon as its next meeting after the board kept its powder dry.

Stock in Focus: Tesla (TSLA:Nasdaq)

​​​​​​​​​​​​​​​​​​​​​Tesla shares took another hit following a worse-than-expected second quarter result and news that their chief technology officer, JB Strubel, who had been with the company for 15 years and played crucial role in its battery technology, is stepping down.

Tesla delivered another (non-GAAP) loss of $1.12 per share, which missed market expectations by a significant $0.72 per share largely due to a greater portion of sales attributed to lower margin model 3 vehicles, also missing revenue expectations as Tesla’s performance lags behind its ‘lofty’ expectations.

The highlight was operational improvements which helped generate $614m of free cash flow putting Tesla in a comfortable position as they prepare to launch Model 3 production in China and Model Y production in the US. Tesla remains optimistic about the rest of the year, expecting to continue to be cashflow positive with the business now grown to the point of being self-funding. Tesla are aiming for positive GAAP net income in the third quarter and following quarters to follow maintaining their guidance of 360,000 to 400,000 total deliveries for the full year. 

From a big picture point of view, we have said that buyers of Tesla shares in essence need to believe in the Tesla story and Elon Musk – as an industry disruptor and his ability to develop market leading technology. However, their market leading position might be under threat as well-established car manufacturers (with better manufacturing capabilities) enter the market with their EV’s with technology likely to catch up, making the market more competitive and challenging for Tesla.

We currently have a HOLD rating on Tesla.
 

 

  
Australia & New Zealand Market Movers

​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​The Australian market wiped $53bn of market value on Tuesday (ASX 200 index -2.44%) as the major banks led the market losses with investors selling out of the economically sensitive stocks. Tech stocks such as WiseTech and Afterpay were smashed for a second session as investors looked away from growth names and looked towards safer havens. Chinese exposed stocks were also hit, including Treasury Wine Estates, Blackmores, and Bellamy’s Australia.

The New Zealand market tumbled yesterday (NZX 50 index -1.66%) on signs China may use its currency to stand up to the US in the two countries’ escalating trade war. Stocks were lower across the board, with Vista Group leading losses. The latest data showed NZ’s unemployment rate unexpectedly fell to an 11-year low of 3.9% in the June quarter, however it will unlikely be enough to deter the Reserve Bank from cutting interest rates today given global developments.
 

3 Things Markets Will be Watching this Week

  1. ​​​​​​US Corporate earnings season continues this week, with some Australian companies also set to make earnings announcements.
  2. The Reserve Bank of Australia makes an interest rate decision on Tuesday.
  3. The Reserve Bank of New Zealand makes its latest interest rate announcement on Wednesday.

 

Have a Great Day,
 

Team

US stocks rose about 1% as China stepped in to stabilize the Yuan, soothing concerns that currencies would be the latest weapon in the long-drawn trade war, a day after Wall Street suffered the sharpest one-day percentage drop of the year.

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