Morning Market Update - 18 June 2020


Pre-Open Data

International Markets vs Australian Market

Key Data for the Week

Key economic data released this week:

  • Wednesday – AUS – HIA New Home Sales fell 4.2% in April, following a 1.1% fall in March.
  • Wednesday – EUR – Consumer Price Index remained at 0.1% on an annual basis, however fell 0.1% in May.
  • Wednesday – UK – Consumer Price Index eased from an annual rate of 0.8% in April to 0.5% in May, the weakest level since 2016.
  • Thursday – AUS – Unemployment Rate
  • Thursday – UK – BoE Interest Rate Decision

    S&P ASX 200 Last 12 Months

Australian Market

The Australian sharemarket rose 0.8% yesterday, with all sectors higher except Materials. Mining heavyweights BHP and Rio Tinto both fell 0.7%, while Fortescue Metals slipped 1.8%.

Health Care stocks rose; CSL gained 1.1%, Cochlear added 1.2%, Sonic Healthcare rose 1.6% and Ramsay Health Care closed 1.9% higher.

Financials were buoyed by the big four banks; Commonwealth Bank added 0.7%, NAB rose 0.6% and Westpac gained 0.3%, while ANZ slipped 0.4%.

Auckland Airport gained 3.9% after receiving a waiver of its debt covenants from US investors.

Wind farm operator Infigen gained 7.3% after recommending an $835 million, $0.86 per share takeover bid from Spanish company Iberdrola.

The Australian futures market points to a 0.61% fall today.

Overseas Markets

European sharemarkets ended higher on Wednesday, with the board based STOXX Europe 600 up 0.7%. Consumer stocks were stronger; HelloFresh rallied 5.6%, Nestlé rose 3.2% and Tesco added 0.5%. Financials eased as Barclays and Lloyds Bank fell 2.7% and 1.7% respectively.

US sharemarkets were mostly lower overnight to end a three-day winning streak. Energy was the weakest performing sector, while consumer and technology stocks bucked the trend to close slightly higher. AT&T fell 1.7% as the company informed the Communications Workers of America of its plans to cut over 3,400 technician and clerical jobs across the country over the next few weeks. Financials services were mixed; PayPal and Visa rose 1.6% and 0.4% respectively, while MasterCard slipped 0.2%. E-commerce giants Amazon and Alibaba gained 1.0% and 0.7% respectively.

By the close of trade, the Dow Jones and S&P 500 fell 0.7% and 0.4% respectively, while the NASDAQ gained 0.2%.

CNIS Perspective

Companies are asking lenders and bondholders to substitute last year’s profits for this year, to basically pretend the coronavirus hasn’t happened, to avoid breaching debt covenants.

US events group Live Nation and Hong Kong luggage maker Samsonite are among companies employing this tactic. Debt holders have so far accepted it because acknowledging depressed 2020 earnings could cause problems on both sides. If current profit figures were used, these companies would be unable to access their revolving credit facility, putting themselves in a worse position. 

When companies breach terms known as covenants, such as a requirement to stick within certain ratios of debt to earnings, lenders are normally at liberty to demand immediate repayment, or in extreme cases, trigger restructurings and take control of business assets. 

The use of historical figures is the latest move by cash-strapped businesses to increase the attractiveness of their books. Some have started reporting estimates of profits that would have been made if the viral outbreak had not happened and calling it ‘EBITDAC’, earnings before interest, tax, depreciation, amortisation and coronavirus.

If covenants are tested with real actual EBITDA and companies don’t receive a waiver, then they would likely default, which generally is not in the interest of bondholders and creditors. If many more borrowers try to pass off historical numbers as current, lenders may be less flexible next time around.

Should you wish to discuss this or any other investment related matter, please contact your Investment Services Team on (02) 4928 8500.


Disclaimer

The material contained in this publication is the nature of the general comment only, and neither purports, nor is intended to be advice on any particular matter. Persons should not act nor rely upon any information contained in or implied by this publication without seeking appropriate professional advice which relates specifically to his/her particular circumstances. Cutcher & Neale Investment Services Pty Limited expressly disclaim all and any liability to any person, whether a client of Cutcher & Neale Investment Services Pty Limited or not, who acts or fails to act as a consequence of reliance upon the whole or any part of this publication.

Cutcher & Neale Investment Services Pty Limited ABN 38 107 536 783 is a Corporate Authorised Representative of Cutcher & Neale Financial Services Pty Ltd ABN 22 160 682 879 AFSL 433814.

Topics: CNIS, Australian Market, ASX, international markets

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