Nerves of Steel Are Needed If Iron Rally Is Over: Taking Stock

Apr 18 2019, 6:09 AMApr 18 2019, 7:09 AMApril 18 2019, 6:09 AMApril 18 2019, 7:09 AM

(Bloomberg) -- Consolidation: day 11. The Stoxx Europe 600 is still stuck in a tight range as the earnings season is getting in full swing. The first results have been generally ok so far, albeit with a low bar. Looking at sector performances, the mining sector is still the top this year and miners have been partying on soaring iron ore prices. But there’s a shift in the newsflow this week, which could crash the party.

Rio Tinto was first to cut its production targets, in a widely expected move. BHP Group followed through with a similar warning. This isn’t a big deal given soaring iron ore prices were still guaranteeing a decent margin improvement that would largely compensate lower volumes and cost inflation. Vale’s unexpected swift restart of production may be a game changer.

Among the members of the Stoxx 600 basic resources index (SXPP), Rio and BHP are the most impacted by iron ore price moves, with 43 and 35 percent of 2018 revenues respectively, while Anglo American has a 13 percent exposure. Outside the sub-index, Ferrexpo is the main pure-play.

Iron ore shipment issues might not be over just yet, the risk could lie in prices getting ahead of themselves in anticipation of massive shortages that may not materialize in the end. It will impact the SXPP as Rio, BHP and Anglo have a 49 percent weight in the index. Analysts have yet to adjust their forecasts, while all three stocks already trade near or above consensus price targets.

It’s not just iron ore, though. Copper is still one of the main drivers of miners’ performance. Prices stalled since the end of February, but seemed to have broken out yesterday. Voices are also warning that the market will go into deficit this year. In fact, opportunities might arise from other metals’ moves, especially as China’s growth held unexpectedly well in the first quarter, and further stimulus measures are still on the table.

HSBC analysts wrote in a note this week that EPS sensitivity is relatively high to base metals for South32 and Glencore, seeing significant potential EPS upside from spot in aluminium, copper, nickel and thermal coal prices. Both stocks have substantial leverage to changes in these commodities’ spot prices, they said.

In the meantime, Euro Stoxx 50 futures are trading down 0.3% ahead of the open, while investors are getting more skeptical about the rally, seeing the Stoxx Europe 600 falling almost 9 percent by the end of the year, as our latest survey shows.

SECTORS IN FOCUS TODAY:

COMMENT:

“De-equitisation remains a key global investment theme for the next 12-18 months,” Citi strategists write in a note. “As the cost of equity remains high relative to the cost of debt, it makes sense for companies to de-equitise – use cheap financing to buy back their own shares. Since 2011, global non-financial corporates have bought back ~$4.8trn of their own shares, equivalent to 15% of average market cap over the period.”

COMPANY NEWS AND M&A:

NOTES FROM THE SELL SIDE:

Morgan Stanley says EssilorLuxottica’s initiation of a search for a future CEO should be “taken well” by investors, given recent corporate governance problems at the newly merged French and Italian eye-wear company. Keeps an equal-weight rating as further clarity will be required for investors to fully regain confidence on the governance situation.
Kering’s first-quarter results came in ahead of its industry but not the analyst consensus, Citi wrote in a note, adding that it may not be enough for further earnings momentum and re-rating.

TECHNICAL OUTLOOK for Stoxx 600 index:

Resistance at 392.7 (July high); 403.7 (100% Fibo)
Support at 385.7 (76.4% Fibo); 374.5 (61.8% Fibo)
RSI: 68.9

TECHNICAL OUTLOOK for Euro Stoxx 50 index:

Resistance at 3,516 (76.4% Fibo); 3,596 (May high)
Support at 3,403 (61.8% Fibo); 3,309 (50% Fibo)
RSI: 72.4

MAIN RESEARCH AND RATING CHANGES:
UPGRADES:

Countryside upgraded to neutral at JPMorgan; PT 3.75 Pounds
Grammer upgraded to hold at Quirin Privatbank AG; PT 38 Euros
ING FP raised to overweight at Morgan Stanley; PT 78 Euros
Ludwig Beck upgraded to buy at Montega; PT 35 Euros
Vopak upgraded to hold at Bank Degroof Petercam; PT 43 Euros

DOWNGRADES:

ASML downgraded to hold at Nord/LB; Price Target 195 Euros
Atlas Copco cut to reduce at Kepler Cheuvreux; PT 247 Kronor
Ericsson Downgraded to Sell at SEB Equities; PT 70 Kronor
KWS Saat downgraded to hold at Nord/LB; Price Target 65 Euros
Nordex downgraded to neutral at Goldman; PT 15.30 Euros
Proximus downgraded to neutral at JPMorgan; PT 25 Euros

INITIATIONS:

Fluxys Belgium rated new buy at Kepler Cheuvreux; PT 28.50 Euros
Medicrea rated new buy at Kepler Cheuvreux; PT 3.15 Euros
Securitas reinstated underweight at Morgan Stanley

MARKETS:

MSCI Asia Pacific up 0.2%, Nikkei 225 down 0.8%
S&P 500 down 0.2%, Dow little changed, Nasdaq down 0.1%
Euro up 0.04% at $1.13
Dollar Index down 0.02% at 96.99
Yen up 0.16% at 111.88
Brent down 0% at $71.6/bbl, WTI little changed at $63.8/bbl
LME 3m Copper down 0.4% at $6530/MT
Gold spot down 0.1% at $1272.5/oz
US 10Yr yield down 3bps at 2.57%

MAIN MACRO DATA (all times CET):

9:15am: (FR) April Markit France Manufacturing PMI, est. 50, prior 49.7
9:15am: (FR) April Markit France Services PMI, est. 49.8, prior 49.1
9:15am: (FR) April Markit France Composite PMI, est. 49.7, prior 48.9
9:30am: (GE) April Markit/BME Germany Manufacturing PMI, est. 45, prior 44.1
9:30am: (GE) April Markit Germany Services PMI, est. 55, prior 55.4
9:30am: (GE) April Markit/BME Germany Composite PMI, est. 51.7, prior 51.4
10am: (EC) April Markit Eurozone Manufacturing PMI, est. 48, prior 47.5
10am: (EC) April Markit Eurozone Composite PMI, est. 51.8, prior 51.6
10am: (IT) Feb. Industrial Sales WDA YoY, prior 0.6%
10am: (IT) Feb. Industrial Sales MoM, prior 3.1%
10am: (IT) Feb. Industrial Orders NSA YoY, prior -1.2%
10am: (IT) Feb. Industrial Orders MoM, prior 1.8%
10am: (EC) April Markit Eurozone Services PMI, est. 53.1, prior 53.3
10:30am: (UK) Bank of England Credit Conditions & Bank Liabilities Surveys
10:30am: (UK) March Retail Sales Ex Auto Fuel MoM, est. -0.3%, prior 0.2%
10:30am: (UK) March Retail Sales Ex Auto Fuel YoY, est. 4.0%, prior 3.8%
10:30am: (UK) March Retail Sales Inc Auto Fuel MoM, est. -0.3%, prior 0.4%
10:30am: (UK) March Retail Sales Inc Auto Fuel YoY, est. 4.5%, prior 4.0%