14/01/10 - 15:45
Ben Potter - Research Analyst, IG Markets
Afternoon thoughts from the Trading Room – 3.45pm
Equity markets have rebounded across Asia today after US markets saw broad-based gains and Australian employment rose three times more than economists forecasted. Japan’s Nikkei 225 is leading the region, up 1.2% while the Kospi and Hang Seng are higher by 0.9% and 0.6% respectively. The Shanghai Composite is flat.
The Australia 200 CFD Index is up 0.9% at 4910.6 after hitting a high this morning of 4920.5. This came after the release of stronger-than-expected employment numbers. Overall, gains are fairly broad-based, however once again it’s the materials and financials putting the most points into the index.
In particular, Perilya and Kagara Zinc are among the best performers in the ASX 200 after zinc had a strong session overnight.
After a couple of weak days we’ve seen a good rebound in global markets. Participants seem to have overcome the news from China and are beginning to realise that in the long run, it’s positive.
Stronger-than-expected unemployment numbers gave the ASX and the AUD a good boost. The market was cooling on the prospects for a February rate rise but this has put the ball firmly back in play. It is commonly known that the Australian economy is the strongest in the western world, but even the most bullish of forecasts did not predict 35,000 jobs being created.
These numbers should boost investor’s appetite for risk, especially as European trade comes online. We would expect to see the AUD trade convincingly above 93 cents tonight.
Market Update from the Trading Room – 1.00pm
ASX 200 Index: 4912 (+0.9%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Materials | 1.5% | Consumer Discretionary | -0.2% | |
| Financials | 1.0% | Energy | 0.2% | |
| Property Trusts | 0.9% | Telecommunications | 0.2% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| BHP Billiton | 11.2 | WorleyParsons | -0.4 | |
| Commonwealth Bank of Australia | 4.6 | News Corporation | -0.3 | |
| Westpac Banking Corporation | 4.2 | Insurance Australia Group | -0.3 |
Economic data - Australian employment jumped sharply in December with a further 35,200 jobs created versus an expected rise of 10,000. The unemployment rate fell to 5.5% from 5.6% in November. The market had been expecting a rise to 5.8%. The results indicate a very high chance the RBA will raise interest rates further at its February policy meeting. When viewed with other recent strong data, the RBA may also look at a March hike too.
Commodities – In a report from Goldman Sachs JBWere, they said the bulk commodity markets appear "genuinely tight at present" with spot prices for iron ore, coking coal and thermal coal tracking well above current contract prices. They see upside risk to its current forecasts. The broker’s preferred commodities for 1H 2010 are coking coal, iron ore, platinum, thermal coal and copper. The outlook for Platinum looks strong on the basis of supply constraints, coupled with last week's trading start of platinum and palladium exchange traded products in the US. However, the broker is less comfortable with base metals, where prices are running ahead of fundamentals, even copper.
Australian Banks – In a note from Fitch Ratings, they believe Australian bank revenue growth in FY10 could be restrained as households continue to reduce debt (a process which could hit smaller lenders particularly hard). It also adds that restricted access to wholesale funding markets and rising deposit costs could mostly hurt smaller banks, while rising unemployment could impact asset quality for all banks. Economic slowdown is still filtering through the SME and consumer sectors, which in turn is likely to lead to higher impaired assets in 1H.
Newcrest Mining and Lihir Gold – In a broker note from Credit Suisse, they have downgraded Newcrest Mining to ‘neutral’ from ‘outperform’ and Lihir Gold to ‘underperform’ from ‘neutral’ after revising its gold supply-demand balance to a more bearish stance. They now expect a 420 ton surplus in gold markets in 2010, up from 110 tons. The broker highlighted that its gold price assumption of US$1,025/oz is well below current spot prices of $1,137/oz. Looking forward to 2010, Credit Suisse cut its gold price forecast to US$1,010 from US$1,090. Newcrest Mining is its preferred gold exposure as it sees upside risk on new earnings projections from copper prices. The broker increased Newcrest’s target price to $42 a share from $35.
WorleyParsons – Following WorleyParsons’ profit downgrade yesterday, a raft of brokers cut their price targets. WorleyParsons revised its profit forecast to $280 - $320 million, down from its October forecast of $320 - $350 million, citing uncertainty over how governments may combat climate change. Credit Suisse, which cut its rating on the stock to ‘underperform’ from ‘neutral’ and said the downgrade is a reflection of global capital expenditure markets rather than a Worley’s specific issue. Credit Suisse reduced its rating given Worley trades at a 14% PE premium to its peer and cut its price target to $26.70 from $29.60. Goldman Sachs JBWere cuts its price target by 11% to $30.08. Deutsche Bank lowered its price target to $27.10 from $30.65 and said the group faces "significant headwinds" in fiscal 2010 from project delays. UBS bucked the trend with an upgrade to ‘neutral’ from ‘sell’, citing the declines in the share price. UBS cuts its price target to $26.00 from $29.00.
Woodside Petroleum – The oil giant looks to be facing further uncertainty over the development of its Sunrise LNG field. East Timor’s Secretary of State reportedly said proposals from Woodside to use either a pipeline to Darwin or a floating LNG platform ‘would not be approved by the government’ of East Timor (which wants an LNG plant built on its own coastline). While Woodside Petroleum reiterates the ’significant social and economic benefits’ from petroleum revenues and employment opportunities that the project would bring to East Timor. It appears the 2011 approval deadline will still have some hurdles to overcome. It’s unlikely to have a significant impact on shares as few analysts have factored Sunrise into their Woodside profit models because of the project's long history of false dawns.
Virgin Blue – In a note from JPMorgan, the broker increased its 12-month price target to $0.88 from $0.70. They removed their discount to its $0.78 valuation on the grounds that the outlook for its long haul international arm V Australia continues to improve. However, it still notes that this remains a key risk for stock, alongside fuel costs and capacity management. JPMorgan retains its ‘overweight’ rating.
Overnight Market Report - 9.00am
In overnight trade, optimism following broker upgrades returned to the market and drove stock prices higher on both sides of the Atlantic. Oil prices drifted however, after a bigger-than-expected increase in inventory numbers.
There’s a feeling the reaction to the China’s move might have been a bit overdone. People are now beginning to realise that in the long run, this is a positive shift by China.
The technology laden Nasdaq was the session’s best performer overnight, rising 1.1% while the broad-based S&P 500 could only manage a gain of 0.8%. The Dow Jones Industrial Average rose 0.5%.
All sectors in the US finished in the black, apart from telecommunications. Healthcare was the best performer, rising 1.5%, after Credit Suisse raised its investment rating to ‘neutral’ for drug maker, Merck, and boosted its target price. This upgrade got all the drug makers moving.
Turning our attention to Australia, the SPI futures are calling the Australia 200 CFD Index to open 0.5% higher at 4891.
Apart from the telecommunications sector, all local sectors have positive leads from their US counterparts. Despite some weakness for Rio Tinto and BHP Billiton in London, we should see some strength return to the materials sector as the sector gained 1.2% in US trade, and base metals and gold are all higher since our 4pm close yesterday.
Our financials should be well supported after US financials had a good night. The S&P Financials sector rose 1.2% with participants looking ahead to a strong earnings season, beginning with JPMorgan on Friday.
At 11.30, Australia’s employment data is due for release. Surveys show the market is expecting a slight rise in the unemployment rate. There seems to be a growing feeling however, that the risk is for a better-than-expected number. This would likely heighten expectations of further rate rises and boost the AUD.
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