15/01/10 - 15:30
Ben Potter - Research Analyst, IG Markets
Afternoon thoughts from the Trading Room – 3.30pm.
Across Asia, regional markets are mixed today as Intel’s better-than-expected Q4 report boosted technology stocks, in turn helping to offset falls among steel and energy companies. The Shanghai Composite and Kospi are the best performers, both up 0.7% while the Nikkei 225 and Hang Seng are lower by 0.1%.
Locally, the Australia 200 CFD Index is weaker by 0.7% at 4860.5 despite relatively positive leads from Wall St and Intel’s better-than-expected after hours result. Before the open, all indicators pointed towards a mildly positive session with weakness in energy and materials likely to be offset by strength among financials.
Shortly after the open, the market dropped off, hitting a low of 4857.8. This was surprising as leads certainly weren’t negative and we thought Intel’s result would boost sentiment.
We can only assume that traders dont want to hold positions over with weekend, especially considering there are some important economic releases due out tonight in the US and Europe, as well as JPMorgan reporting its 4th quarter results. Also, Monday is Martin Luther King Day in the US so there will be no trade. Volumes are very light too, which could be exaggerating some of the selling.
The market is consolidating some of its recent gains. It’s holding nicely above the 4830 – 4840 support level which is positive. A close below that might see it retreat towards the 4750 level.
Woodside Petroleum and Santos are dragging the energy sector south while Bluescope Steel is the worst performer among blue-chip materials.
The big four banks are weighing the financial sector down, as is QBE Insurance Group.
Market Update from the Trading Room – 1.30pm
ASX 200 Index: 4865 (-0.7%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Consumer Discretionary | 0.2% | Information Technology | -1.3% | |
| Property Trusts | -0.1% | Utilities | -1.0% | |
| Healthcare | -0.1% | Telecommunications | -0.8% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| Fortescue Metals Group | 0.4 | BHP Billiton | -6.0 | |
| Sonic Healthcare | 0.4 | Westpac Banking Corporation | -3.0 | |
| News Corporation | 0.3 | Commonwealth Bank of Australia | -2.5 |
Macarthur Coal – Despite boosting its first half profit guidance and full year sales forecast this morning, the stock is down 2.3% on disappointment over timing of coal shipments from Middlemount. Macarthur Coal upped 1H10 profit guidance to between $37 and $42 million from a range given in November of $30 to $38 million. The upgrade is due to strong 1H10 sales of 2.8 million metric tons, ahead of guidance for between 2.4 and 2.7 million. They also upped their full year sales forecast to between 4.8 and 5 million tons, up from previous conservative amount of 4.6 million tons. However, they had bad news on the Middlemount development. Macarthur now say it is unlikely to ship any coal in fiscal 2011 due to a lack of progress on agreements on temporary water and rail infrastructure. In a note from UBS, people had been expecting Macarthur could sell as much as 900,000 tons of Middlemount coal in 2011. You are now looking at roughly a 10% downgrade to volume in fiscal 2011.
Karoon Gas – Karoon Gas continues to slide, down 1.4% after slumping 24% yesterday, indicating that investors are unconvinced by management's reassurance that inconclusive early tests at key Poseidon-2 well may be down to a mechanical glitch. Today's fall in the share price means Karoon’s stock is now below its 22 December level when it said the Poseidon-2 well had struck hydrocarbons with similar intervals to those penetrated by company-transforming Poseidon-1 well (about six kilometres away). A report from Macquarie Group said the “inconclusive" initial test result on its Poseidon-2 natural gas well was unfortunate. It did not fit with developments at the well head and, consequently, significant uncertainty about the ultimate result remains. It is clear that early results have not been encouraging, suggesting that the test may have been conducted below the gas/water contact, which would limit the upside resource case. The Karoon investment rationale is "largely built" on the Poseidon discovery, with the shares rallying 53% in the week following the initial discovery. Macquarie Group retains its $8.50 price target and an ‘underperform’ rating.
Santos – In a report from Merrill Lynch, Santos was downgraded to ‘neutral’ from ‘buy, with their target price trimmed to $14.73 from $16.03 on the back of higher cost estimates for Santos’ Gorgon LNG project and the risk of a material capital raising. They envision gross capex for a two train development at GLNG of $20 billion. To be clear, Merrill Lynch still believe in a positive long-term outlook for Asian gas demand. But, they note it is currently a buyer’s market, given supply potential outstrips the demand outlook. Combined with evidence of cost pressures and labour constraints, they believe regional LNG project returns will be squeezed. Asset quality will be the differentiating factor as to which projects will make it to final investment decision along the timelines currently presented by management teams. Against this backdrop, Merrill Lynch is lowering their overall exposure to LNG-biased explorers and producers. Their preferred LNG exposure is Oil Search.
Rio Tinto – In a document from Citigroup, Rio Tinto was downgraded to ‘hold’ from ‘buy’ despite the broker lifting their target price to $83 from $79 after a solid Q4 production. They believe ‘it’s time for a breather’. Citigroup lifted core net profit forecast for 2009 by 10% to US$5.66 billion on the back of good production numbers and mark-to-market of commodity prices but says it's still below the market consensus of US$5.8 billion. They also increased 2010 net profit forecast by 6% to US$7.97 billion except warns significant upside potential remains from iron ore and base metals given their conservative forecasts.
Coca-Cola Amatil – In a report from Credit Suisse, Coca-Cola Amatil was downgraded to ‘underperform’ from ‘neutral’. They believe the share price (last at $11.24) has run ahead of the earnings, noting solid pricing through southern hemisphere summer. This was anecdotally exemplified by the $4.30 cost for a Powerade in Melbourne's CBD. They retain their target price of $10.85 and expect a period of consolidation, with most of the upside from pricing and stable volumes captured in its 9% EPS growth forecasts in 2009.
Overnight Market Report - 9.00am
In overnight trade, US stocks advanced for a second session. Technology shares lead the way ahead of Intel’s result after the closing bell. On the economic news front, an unexpected increase in business inventories helped to offset a bigger-than-expected drop in retail sales.
Intel is seen as a real test for both the tech sector and the broader economy. Its chips are in so many consumer and business products; it’s a very good barometer of overall spending.
The market seems to be in a bit of a holding pattern at the moment. We can have one day of economic data showing the recovery is full steam ahead. A day later, the data can suggest it may be slowing.
The economics are important but we think the earnings reports will give the market a much better insight into the health of corporate America.
The NASDAQ was the best performer, rising 0.4%. The Dow Jones Industrial Average gained 03% and the broad-based S&P 500 finished higher by 0.2%.
In Australia, the SPI futures are calling the market to open 0.2% higher at 4908. Most of the support will likely come from the financials and defensive healthcare sectors. Following yesterday’s upgrade for Merck, the healthcare sector continued to push stronger overnight and was the best S&P sector, rising 0.9%.
The banks managed to shrug off Obama’s talk of a fee to help repay bailout money, with the S&P Financials sector gaining 0.5% and the KBW Banking Index up 1.6%.
However, the materials sector is likely to hold the market back following a mixed bag of leads. In US trade, the S&P Materials sector was the worst performer, finishing lower by 1.2%. BHP Billiton’s ADR is calling the stock down approximately 1% on the open.
In news just through, Intel’s Q4 result has smashed expectations. EPS came in at 40c vs forecasts of 30c and top line revenue was $10.6 billion vs expectations of $10.2 billion. The stock jumped 4% in after hours trade and is likely to boost S&P 500 futures during their night session.
Given Intel’s bellwether status, this very positive result could have a strong impact on participant’s expectations for the remainder of the earnings season. It could certainly boost sentiment towards Asian and Australian trade.
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