Taking Stock - JPMorgan reported profit that exceeded expectations

In today's taking stock we discuss, JPMorgan tops estimates after posting $2.3 billion boost from better-than-expected loan losses.

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MARKET COMMENTARY

SOUTH AFRICAN MARKET COMMENTARY

Equity markets suffered yesterday with the All-Share index down 0.3% (to 67,088 index points) sharply underperforming the MSCI global emerging market index which jumped 1%. Nervous investors dumped property and retail stocks directly damaged by the looters, with the property index dropping 2.55% and Vukile Property Fund tumbling more than 7%. SA Corporate said on Tuesday four out of 11 retail shopping centres that had been looted had suffered extensive damage. Massmart, majority-owned by US Walmart, led the decliners, falling 7.53% as looters continued to ransack its Game and Makro stores, as well as warehouses.

 

EUROPEAN MARKET COMMENTARY

European stocks struggled for direction on Tuesday as investors digested hotter-than-expected US inflation data and corporate earnings. The pan-European Stoxx 600 index closed little changed, holding near a record high set on Monday, as sectors and major bourses moved in opposite directions. Telecoms were among the biggest gainers, climbing 0.9% on the back of strong corporate results from Finnish telco Nokia. Concerns over the fast-spreading delta variant of Covid-19 weighed on sentiment. France, the Netherlands, Greece and Spain all announced new restrictions on Monday in a bid to curb rising infections.

 

US MARKET COMMENTARY

US stocks fell to reverse course on Tuesday, with the S&P 500 pulling back from a record high as investors monitored an early batch of corporate earnings results. Inflation was also back in focus and new data showed consumer prices surged by the most since 2008 in June. The choppiness came after a hotter-than-expected print on consumer price inflation Tuesday morning. The Labor Department's headline consumer price index rose 0.9% in June over the prior month, unexpectedly accelerating from May's 0.6% rise. Over last year, the CPI was up 5.4%, also exceeding the 4.9% increase expected and coming in at the fastest pace since 2008.

 

ASIAN MARKET COMMENTARY

Shares in Asia-Pacific mostly slipped in early morning trade today following a hotter-than-expected US inflation report for June overnight. In economic news, Singapore’s economy grew 14.3% year-on-year in the second quarter, official advanced estimates showed Wednesday. It was slightly above economist expectations for a 14.2% year-on-year jump, according to a Reuters poll. Still, the economy contracted by 2% as compared with the previous quarter, Singapore’s Ministry of Trade and Industry said.

 

CURRENCY MARKET COMMENTARY

The rand dropped to a three-month low on Tuesday and local and hard currency bonds suffered as violent protests over economic hardship and inequality rippled across the country. Crowds clashed with police and ransacked or set ablaze shopping malls, with dozens of people reported killed as grievances unleashed by the jailing of ex-president Jacob Zuma boiled over into the worst violence in years. At the close, the rand was trading around R14.75 to the dollar, 2.41% weaker.

 

COMMODITIES MARKET COMMENTARY

Gold prices were subdued this morning, weighed down by a firm dollar after data showed US consumer prices last month rose by the most in 13 years, with focus now shifting to Federal Reserve Chair Jerome Powell’s testimony before Congress. Oil prices fell earlier today on future demand concerns after data showed that China's first-half crude imports dropped, but were still holding near a one-week high amid concerns about supplies as the world recovers from the coronavirus pandemic. China's crude imports dropped by 3% from January to June compared with a year earlier, the first such contraction since 2013, as import quota shortages, refinery maintenance and rising global prices curbed buying.

LOCAL COMPANIES

Tongaat Hulett (TON) -2.9%

Sugar producer and land developer Tongaat Hulett posted a wider headline loss of just over R1.1 billion on Tuesday for its financial year ending March 31, 2021, compared to a headline loss of R285 million for the prior full-year. This saw the KwaZulu-Natal based group, which was rocked by an accounting scandal involving former executives just over two years ago, reporting a FY21 headline loss per share of 822 cents (2020: loss of 211 cents). Tongaat Hulett could not declare a dividend yet again as it is still navigating a turnaround strategy and a significant debt burden. South Africa’s broader Covid-19 economic fallout last year and continued hyperinflation in Zimbabwe did not help the group’s turnaround efforts. The company’s full-year revenue from continuing operations (excluding its disposed starch operations) fell 3% to R14.9 million, compared to R15.4 billion in 2020. Its operating profit for the period saw a 44% plunge, to R1.8 billion from R3.25 billion in 2020. Cash generated from operations came in at just over R1.8 billion compared to R2.3 billion for the prior year. However, the group maintained that its turnaround remains on track as it managed to slash its debt by almost half during the financial year. Commenting on the latest financial performance, Tongaat Hulett CEO Gavin Hudson said despite headwinds such as Covid-19, the group’s turnaround efforts continue to yield positive results. “The results are presented against a backdrop of unprecedented and challenging times triggered by the Covid-19 pandemic. Our focus has been on continuing operations and the safety of our people,” he noted.

 

Huge Group (HUG) -10.5%

Three months after being forced to take down videos from its website in which it implored Adapt IT shareholders to accept its offer to buy the software services group, Huge Group has again gone on the offensive. In a new video sent to shareholders on Tuesday, Huge Group implored Adapt IT shareholders to accept its all-share offer over Volaris Group of Canada’s competing all-cash offer of R7/share. The release of a new video follows two earlier videos that Huge Group was forced to take down by the Takeover Regulation Panel, which regulates mergers and acquisitions in South Africa. The TRP objected to the videos Huge Group published online, saying they constituted announcements. In the new video, Huge Group CEO James Herbst and other executives say: “We are offering to give you 1.37 Huge shares for every Adapt IT share you own. Volaris is offering to give you R7 for each Adapt IT share you own, so our offer is greater!” The release of a new video coincides with the approval by shareholders of the resolutions required to pursue the Adapt IT deal. Some 99% of shareholders who attended (attendance was about 90%) voted in favour of the resolutions. Huge Group’s latest move comes less than two weeks after about 87% of Adapt IT shareholders voted in favour of the Volaris offer, paving the way for the company to be acquired and delisted from the JSE.

INTERNATIONAL COMPANIES

JPMorgan (JPM) -1.5%

JPMorgan Chase on Tuesday reported second-quarter profit and revenue that exceeded analysts’ expectations as the banking giant released money set aside for loan losses. One key factor is that after the industry set aside tens of billions of dollars for loan losses last year, banks have been releasing reserves as borrowers have held up better than expected. That happened in the second quarter at JPMorgan, the biggest U.S. bank by assets. The firm posted a $2.3 billion boost from releasing $3 billion in loan loss reserves after taking $734 million in charge-offs. The bank had a $5.2 billion reserve release in the first quarter. “Consumer and wholesale balance sheets remain exceptionally strong as the economic outlook continues to improve,” CEO Jamie Dimon said in the release. “In particular, net charge-offs, down 53%, were better than expected, reflecting the increasingly healthy condition of our customers and clients.” Trading revenue fell 30% from the year earlier period, an expected outcome after the frenzied activity in the aftermath of Federal Reserve actions to bolster markets during the early stage of the coronavirus pandemic. Investment banking helped offset the drop in revenue from trading. The firm posted $3.4 billion in investment banking revenue, exceeding the estimate by $300 million, on strength in mergers activity and acquisition financing.

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