Highlights on Trade Deal, Yield Curve and Equities

  • Nov 19, 2019 AEDT
  • Team Kalkine
Highlights on Trade Deal, Yield Curve and Equities

As per recent update on Trade Deal, Larry Kudlow, White house economic adviser stated that the United States may enter into an interim trade pact with China. This came immediately after a media reports stating that the US-China trade negotiations may again face heat over farm purchases with China not in terms of one-sided negotiation favouring United States. In another update, Fed Chief Jerome Powell stated that negative interest rates sought by US president not good for the US economy as of now. Investors are though little worried of the present scenario where there is a mixed reaction over trade deal as Mr. Trump in some day threatens additional tariffs over Chinese imports and in another day suggests friendly negotiations. This is the reason, investments in Gold is not off the table and simultaneously markets are making news highs. Gold made its recent 52-week high on September 4, 2019 at US$1557.09 per ounce and is presently trading at US$1457.88 an ounce.

The yield of 10-year U.S. treasury stands at 1.853% while that of 2-year U.S. treasury stands at 1.629% as on 18th November 2019. Not long ago, the 10-2 treasury yields spread became negative towards the end of August 2019. A negative spread is often regarded as an antecedent to a recessionary period.

Meanwhile, S&P 500 recently made its 52-week high at 3120.46 on November 15, 2019. Looking at various other global indices, it can be said that investments in equity market is reviving for an instance S&P/ASX 200 closed at 6766.80 on 18 November 2019, close to its recently made 52-week high level of 6875.50.

Some of the important blue-chip stocks in the index S&P/ASX 200 are BHP Group Limited (ASX: BHP) and Commonwealth Bank of Australia (ASX: CBA).

BHP Group Limited (ASX: BHP)

BHP Group Limited (ASX: BHP) is involved in exploration, development and production of oil and gas; Mining of copper, silver, zinc, molybdenum, uranium and gold; Mining of iron ore; and Mining of metallurgical coal and energy coal.

FY19 Key Highlights for the period ended on June 30, 2019: Profit after taxation attributable to BHP shareholders increased from a profit of US$3.7 billion in FY2018 to a profit of US$8.3 billion in FY2019. Revenue of US$44.3 billion increased by US$1.2 billion, or 3 per cent, from FY2018. This increase was primarily attributable to higher average realised prices for iron ore, petroleum and metallurgical coal, and higher sales volumes at WAIO as a result of record production at Jimblebar and the expiry of the Wheelarra Joint Venture. This was partially offset by lower average realised prices for copper and thermal coal, the impact from Tropical Cyclone Veronica and a train derailment at WAIO, lower volumes from Escondida (lower grade partially offset by record concentrator throughput) and Pampa Norte (fire at electrowinning plant at Spence and heavy rainfall), coupled with lower volumes from Petroleum due to planned Pyrenees dry-dock maintenance and natural field decline.

Total expenses of US$28.0 billion increased by US$0.5 billion or 2 per cent, from FY2018. The increase in changes in inventories of finished goods and work in progress of US$638 million was primarily driven by higher recoveries at the leach pad and inventory drawdowns as more ore was redirected to the concentrators in line with the Los Colorados Extension commissioning at Escondida, and inventory drawdown at Coal due to Tropical Cyclone Trevor and general wet weather affecting all operations at Queensland Coal. Raw materials and consumables used increased by US$202 million driven by higher diesel prices across the Group.

Third party commodity purchases have decreased by US$305 million driven primarily by a decrease in copper price. Government royalties paid and payable have increased by US$370 million reflecting higher iron ore prices. Depreciation and amortisation expense decreased by US$459 million reflecting lower depreciation and amortisation at Petroleum (lower production at Shenzi and increase in estimated remaining reserves at Atlantis) and lower depreciation at Escondida (increase in asset life of the Escondida Water Supply project).

BHP Group Limited

On the stock information front

On November 19, 2019 (AEST 12:39 PM), BHP was trading at $37.250, down 0.294%, with a market cap of ~$110.06 Bn. Its current PE multiple is at 16.340x. The stock has provided a return of -2.22% and 20.26% for the periods of 6-months and 1 year, respectively.

Commonwealth Bank of Australia (ASX: CBA)

Commonwealth Bank of Australia (ASX: CBA) is Australia’s leading providers of financial services. It serves the needs of more than 17.4 Mn customers with a focus on retail and commercial banking.

The Bank expects its operating context to remain challenging as it adapts to heightened regulatory change, increasing competition, evolving customer preferences, and the need to invest in risk and compliance and in technology and innovation. The Bank is however well positioned to navigate this changing landscape with the backing of a resilient balance sheet, strong customer base and leading distribution and digital assets. The bank is focused on continuing to serve its customers’ needs and are making the necessary changes to become a simpler, better bank.

The board of directors declared a fully franked final dividend of 231 cents per share totalling $4,089 Mn, with payable date on September 26, 2019.

In its outlook, the company is expected to monitor and adjust its remuneration policy and frameworks for all employees, so they continue to meet both the spirit and the requirements of revised regulatory standards and reflect evolving community expectations. It is also expected to continue on its path of reinforcing better risk and customer outcomes through remuneration that appropriately balances financial and non-financial performance measures, enables risk and consequence management frameworks, and provides greater transparency to support cultural change. Further, the introduction of regular policy effectiveness reviews will strengthen Board oversight and help to inform its future remuneration approach.

Commonwealth Bank of Australia

FY19 Key Metrics (Source: Company Reports)

On the stock information front

On November 19, 2019 (AEST 12:40 PM), CBA was trading at $80.180, down 0.199%, with a market cap of ~$142.22 Bn. Its current PE multiple is at 16.540x. The stock has provided a return of 3.80% and 17.28% for the periods of 6-months and 1 year, respectively.


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