Market commentary: 'Carry currencies' and the Icahn’s Apple dream

On Monday, European markets managed to snap a positive closing at the end of the trading session after remaining negative throughout most of the day, signaling that investors are still not putting money back into European assets after the recent selloff.

Eurozone government bonds are still struggling to recover the sizable losses taken throughout the past month with yields of German Bunds and peripheral bonds still at the highest levels since the beginning of the year.

US stocks posted modest daily gains continuing to recover from the drop that followed the recent disappointing economic data releases, while, overnight, Asian markets recorded another positive session across the board, with the Shanghai Index gaining as much as 2.58%.

Early this morning the New Zealand Central Bank published the most recent country’s inflation data that showed a surge in inflationary expectations, which are likely to devoid any interest rate’s real discussion at the next Central Bank’s monetary policy meeting.

Governor Graeme Wheeler had previously hinted his willingness to discuss a potential cut to the country’s reference rate, which as at today stands at 3.5%, if inflation had continued to be flat and started to weight on price-setting behaviors. However, today’s better than expected data have prompted traders and analysts to drop their expectations for an imminent interest rate cut. I

n contrast, officials from the Reserve Bank of Australia (RBA) have indicated that the country’s Central Bank will retain the option to cut its interest rate further should the Australian economy continue to slow down. The RBA already cut interest rates twice this year, first in January, and then two weeks ago, bringing the country’s borrowing rate to 2%, the lowest level ever recorded.

The New Zealand Dollar rallied overnight jumping over 1% before settling around the 0.7410 level, while the Australian Dollar has been overall appreciating against the US Dollar for the past six weeks. Investors adopting the so called “Carry Trade Strategy” have traditionally bought Australian and New Zealand Dollars, along with emerging market currencies such as the Turkish Lira and the South African Rant, while borrowing money in a low interest and declining major currency such as the Euro or the US Dollar, aiming to capitalize on the interest rate differential and the capital depreciation of the currency they borrowed in.

However, with the rally in the US currency over the first four months of the year, and the sudden and unexpected rebound of the Euro over the last four weeks, traders have been caught somehow off guard, making this strategy one of the worst currency trades of the year.

Across the Pacific, Apple Inc. returned in the spotlight after billionaire activist investor Carl Icahn raised its price target for the Cupertino-based tech giant to a stunning $240 per share.

The latest valuation given to Apple by Icahn implies a 84.3% upside potential, assuming yesterday closing price, that, in Icahn view, would be fuelled by a 30% EPS growth in FY 2017, large revenues generated by the company’s TV platform, a likely profitable entrance into the car industry and the leverage a winning combination of dividend growth and buyback programs’ expansions.

Although the positive comments of the activist investor contributed to push Apple’s shares up 1.10% during yesterday session, I believe that such optimistic valuations will prove quite unreachable in the short to medium term.

While I still consider Apple to be one of the best run businesses in the world, and I still think the stock is an interesting long term investment both as a growth opportunity and as a dividend growth play, Icahn’s assumptions appear to be aimed more at boosting the share price rather than at realistically underpinning the value of the Cupertino tech company.

To confirm my vision, the Wall Street Journal yesterday published an article claiming that Apple has already abandoned its previous intention to build a TV set, and it is instead working to create a set of online services aimed at competing against Netflix and Amazon’s pay TV platforms.

While the news is per-se interesting, given the highly capital intensive nature of the business and the steepening competition in the sector, I doubt Apple will be able to quickly capitalize on such a product. Despite reporting one of its best quarter, without innovative new products, Apple’s growth, although better than the overall market, may not last as long as Icahn is predicting, making his valuation more an utopic optimism than a realistic forecast.

This article was issued by Paolo Zonno, Trader/Analyst at Calamatta Cuschieri. For more information visit, information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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