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Morning Bell 23 August

Grady Wulff
August 23, 2023

Wall Street closed mixed on Tuesday amid investor concerns over rising bond yields, sentiment wavering ahead of a key speech later this week from Fed Chair Jerome Powell and on key banking downgrades out of S&P Global. Several regional banks including KeyCorp and Comerica fell 4% on Tuesday after S&P Global cut credit ratings on several banks citing ‘tough operating conditions’ as the reason for the downgrade. The S&P500 fell 0.3% on Tuesday while the Dow Jones lost 0.5% and the tech-heavy Nasdaq posted a small gain at the closing bell.

Rising bond yields are placing pressure and adding further downside to equities in the US, with cash and short-dated bonds yielding 5% plus, thus attracting investors to the returns received from bonds over equities at these current levels.

Department store giant, Macy’s, fell 13% on Tuesday after the company reiterated its conservative full-year guidance as it expects comparable sales to fall 6%-7.5%. The sell-off in shares comes despite Macy’s beating Wall Street’s quarterly expectations.

And in Europe, markets closed higher across the region on Tuesday as a rise in technology stocks boosted gains across the board. French game maker Ubisoft Entertainment rose 9% after Microsoft said it would divest several gaming rights to the company as part of a new deal submitted to UK regulators for its takeover of Activision Blizzard, according to CNBC. Investors are also monitoring European natural gas prices which saw a sharp rise earlier this week amid threat of strike action in Australia which could disrupt 10% of the world’s LNG flows. The STOXX600 rose 0.7% on Tuesday while Germany’s DAX added 0.66%, the French CAC rose 0.59% and, in the UK, the FTSE100 lifted 0.18%.

The local market rose just 0.09% on Tuesday following a half a percent loss on Monday as the market volatility driven by global market moves and macroeconomic news out of China continues to impact investor sentiment. China’s sluggish recovery continues to go from bad to worse with weak retail sales and manufacturing output data providing further indication that the world’s second largest economy is struggling to regain momentum post pandemic. With no material stimulus to support recovery coming out of the Chinese government yet aside from some slight interest rate cuts and hub-support, the economy is looking to continue its deflation journey over months to come.

Heavy losses among consumer staples and information technology stocks on Tuesday were offset by strength in the consumer discretionary and energy sectors. IRESS tanked 36% while Premier Investments and Breville led the gains, adding 12% and 9% respectively.

We are also in the heart of reporting season with this week being arguably the biggest week in the August calendar. So far, 107 companies have reported with 35 beating expectations, 42 meeting expectations and 30 missing expectations. 17 companies have been upgraded by brokers, while 10 have been downgraded. We are still being blown away by some retailers maintaining profits in FY23 against the odds and expectations, with Breville Group (ASX:BRG) the latest name to stun investors with FY23 results and the share price soaring 15% as a result, after the company reported revenue rose 4.2%, NPAT lifted 4.2% and the company lifted its full year dividend.

Coles Group reported yesterday with a more disappointing outcome that caused investors to sell out. The supermarket giant reported group sales revenue rose 5.9%, EBITDA rose 3.8%, NPAT fell 0.3% to $1.042bn and the final dividend remained flat at 30cps, taking the year’s total to 66cps. Financing costs for continuing operations also increased by 9.4% to $394m amid higher borrowing costs in the rising interest rate environment.

What to watch today:

  • Ahead of the local trading session here in Australia, the SPI futures are expecting the ASX to open the midweek session down 0.24%.
  • On the commodities front this morning, oil is trading 0.38% lower at US$79.80/barrel, gold is up 0.18% at US$1897/ounce and iron ore is up almost half a percent at US$109/tonne.
  • AU$1.00 is buying US$0.64, 93.68 Japanese Yen, 50.04 British Pence and NZ$1.08.

Trading Ideas:

  • Bell Potter has increased the price target on Mader Group (ASX:MAD) from $6.10 to $6.90 and maintain a hold rating on the leading provider of specialised contract labour for maintenance of heavy mobile equipment in the resources and civil industries, following the release of the company’s FY23 results including revenue up 51% YoY to $608.8m, EBITDA up 57% to $75.1m and underlying NPAT up 48% YoY to $38.5m. Mader Group also expects FY24 revenue of at least $770m and NPAT of at least $50m implying material growth in the new financial year.
  • And Trading Central has identified a bullish signal on Terracom (ASX:TER) following the formation of a pattern over a period of 45-days which is roughly the same amount of time the share price may rise from the close of $0.48 to the range of $0.55 to $0.57 according to standard principles of technical analysis.

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