“The moves higher have also been bolstered by central bank policy, as investors put aside the outlook for earnings and economic ills in favour of the prospect of more monetary easing incoming.
“For now, the party is on and the market is cheering the prospect of monetary policy supporting asset prices.”
Vocus shares rose 14.1 per cent to $4.36 after AGL Energy made a $3 billion takeover bid for telecommunications firm, just a week after Swedish private equity firm EQT withdrew its takeover bid.
The proposal would see AGL buy Vocus shares at $4.85 each as part of a deal that would value it 27 per cent higher than its market capitalisation. AGL shares fell 6.2 per cent to $19.57 this week.
Wesfarmers declined this week after downgrading its profit forecasts for Kmart and Target, citing subdued sales, intense price competition and store closures. Wesfarmers closed the week 5.1 per cent lower at $35.66.
UBS retained its ‘neutral’ recommendation on Challenger by reducing its price target on the company by 15.2 per cent following its profit warning for the fiscal year. “A lower interest rate backdrop combined with reductions to Challenger’s normalised capital gains assumptions has seen it revise its group pre-tax ROE target from 18 per cent previously to RBA cash rate plus 14 per cent,” said analyst Kieren Chidgey. “Although 2019-20 earnings impacts include one-off annuity distribution sales initiatives, we believe ongoing pressures on Life spread margins and domestic sales prospects will constrain EPS improvements beyond this point.” UBS reduced its price target on Challenger from $8.20 to $6.95.
What moved the market
Morgan Stanley says its labour market indicator is suggesting the Reserve Bank will be forced to cut the cash rate and downgrade its forecasts this year. “Our summary labour market indicator ticked up in May, but remains in negative territory suggesting that labour demand is expected to soften despite the recent strong jobs prints,” said equity strategist Chris Read. “Our jobs indicator continues to point to future demand weakness, which should see the RBA cut once more in August alongside another downgrade to forecasts.”
The price of iron ore rose firmly on Thursday amid supply concerns as port stockpiles in China fell and reports of difficulties in procuring Australian iron ore. The price rose 3.5 per cent to $US110.20 a tonne, its highest level in five years. “We are cautious of further upside in iron ore given increasing concerns on the demand side,” said CBA mining and energy commodities analyst Vivek Dhar. “Our major concern is falling steel mill margins in China, which will discourage steel production and iron ore demand.” The price of the bulk has risen 12 per cent in just the last week alone.
The British pound weakened slightly on Thursday as the first round of voting for the new leader of the Conservative Party got underway. Boris Johnson emerged as a firm front runner with 114 votes, while the Foreign Secretary Jeremy Hunt came second with 43 votes. With Mr Johnson now the favourite to win the vote, the prospect of a no deal Brexit is set to rise. While he has said he would not pursue a no deal Brexit, he said it would remain on the table as a vital negotiating tool. “We expect intra‑day pound volatility to lift as the voting continues because the risk is that the new Conservative leader pursues a no‑deal or Hard Brexit,” said CBA currency strategist Kim Mundy.
An attack on two oil tankers in the Gulf of Oman pushed the price of oil higher on Thursday, amid concerns supplies travelling through the Gulf could be restricted. US Secretary of State Mike Pompeo said Iran was responsible for the attacks, pointing to previous attacks in the area which the Islamic Republic is also believed to be responsible for. “Oil remains sensitive to supply disruptions rising despite trade war concerns putting pressure downward on energy demand and the threat of higher US crude production,” said OANDA senior market analyst Alfonso Esparza.
William McInnes covers markets from Sydney including editing the Markets Live blog.