IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

FTSE 5474 -10
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Across Asia, markets are mostly weaker after a drop in US retail sales and higher borrowing costs in Italy and Germany fuelled concern about the global economy. The stalling in underlying retail sales growth in May suggests that the recent easing in jobs growth has started to impact spending. Risk sentiment was fairly resilient in the European session, only to take a hit in US trade. With markets trading relatively risk-off in US trade, Asian markets have picked up on that lead. Taking a closer look at regional markets, the Nikkei is down 0.2%, the Hang Seng has lost 0.5% and the Shanghai Composite has dropped 0.4%. The ASX 200 is off its lows, but is still 0.5% down for the day with the resources the worst performers. European markets are facing a mildly weaker open, while the US is facing modest gains at the open. Ahead today in the US we have CPI, unemployment claims and current account data to look out for. In Europe, there is CPI data and the ECB monthly bulletin on the calendar.

There was plenty of action in the European session, with Greek elections among the main headlines. Some analysts predict a close race between New Democracy and Syriza, and the potential for neither party to win a large enough share of the vote to form a government on its own. Greece's Syriza party leader Tsipras said he is committed to keeping Greece inside the eurozone, but wants to replace the current bailout plan with a ’national plan for reconstruction and growth‘. Moody's cut Spain three notches to Baa3, just one notch above junk status. Moody's sees a risk that more aid may be requested and the rating remains on review for further downgrades. Egan-Jones cut Spain's rating to CCC+, sending it even deeper into junk territory. Eurozone bond markets remain under stress as the sovereign yields continue to rise - not just in the periphery, but also in France and Germany. In the absence of concerted policy response before leaders next meet at the June 28 to 29 EU summit, the euro is likely to come under pressure.

In a market where there seems to be a lack of individual corporate news, Fairfax is getting the focus. The much publicised parcel of 42 million shares at 60 cents is not a huge amount, and if it does transpire, it is the Gina Rinehart, then it is not a huge issue; it does become much more interesting if the stake was increased to 19.9% though. What is Gina Rinehart’s rational for buying (if it is her)? We may not know for some time. However, we feel that for those with a two-year view this is an investment that could make sense. Perhaps there are some strong cyclical headwinds which are causing second-half revenues to drop 8%, but FXJ is still making money, it has good assets in Domain.com, RSVP and Stayz, it has Trade Me, which if stripped out suggests FXJ is trading on a meagre 3.7x. And one wonders, what would happen if it was to sell that at market rates and buy back its own stock? Its balance sheet is also OK, with net debt/EBITDA of 2.1x, well within tis covenants. This is a market that doesn’t want to pay for growth, and while advertising spend is lacklustre most investors are staying clear, however perhaps Gina Rinehart is doing what Warren Buffet has done for years and acted as a contrarian.
www.igmarkets.com.au
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