18/01/10 - 15:30
Ben Potter - Research Analyst, IG Markets
Afternoon thoughts from the Trading Room – 3.30pm.
Across Asia, equity markets have started the week in negative territory following a weaker-than-expected read on US consumer confidence and ahead of a European finance ministers meeting later today to discuss Greece’s financial problems.
Japan’s Nikkei 225 is the worst performer, down 1.4% while the Hang Seng, Kospi and Shanghai Composite are lower by 0.6%, 0.2% and 0.1% respectively.
The Australia 200 CFD Index has managed to move into positive territory, currently up 0.1% at 4902.1 after this morning trading as low as 4865.6. Gains are being driven by strength among the big four banks, offsetting broad-based falls, especially among the big miners.
Before the open we thought it was going to be a tug-of-war between financials strength and materials weakness. However, the market was firmly in the red for most of the morning session as traders focussed on the bearish offshore leads rather than the positives from the Commonwealth Bank of Australia upgrade.
It looks like we have a good chance of outperforming US leads, with a close in the positive being impressive, especially given the US is on holiday tonight and volumes are light.
It’s a busy week on the reporting front. Locally, there are plenty of production reports due and in the US Q4 reporting will kick off in earnest. Given last week’s price reaction to reports from the likes of Alcoa, Intel and JPMorgan, it appears we’re in for a tough couple of weeks. The earnings and expectations bar seems to have been raised very high. A flat result for the US earnings season would probably be a good outcome at this point.
Last year we saw easy gains during the quarterly reporting seasons as expectations were just too low and it proved very easy for companies to post ‘better-than-expected’ results. Now it looks like we’re seeing the opposite.
Market Update from the Trading Room – 1.30pm
ASX 200 Index: 4898 (+0.0%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Financials | 0.8% | Consumer Staples | -1.0% | |
| Utilities | 0.1% | Information Technology | -1.0% | |
| Telecommunications | 0.0% | Health Care | -0.8% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| Amcor | 0.1 | BHP Billiton | 7.0 | |
| Alumina | 0.1 | National Australia Bank | 8.0 | |
| Macquarie Infrastructure Group | 0.1 | Westpac Banking Corporation | 0.1 |
Economics – The Australian TD Securities-Melbourne Institute inflation gauge rose 0.3% on month for December, indicating that price pressures are beginning to rear their head. However, it unlikely to be enough to scare the RBA into upping their pace of rate hikes. TD Securities Senior Strategist Annette Beacher said “After a period of clear disinflation over the year from mid-2008, inflation has now not only bottomed out, but early signals suggest some emerging upside pressure”. Official price data is due to be released on January 27.
Origin Energy – In a note from JPMorgan, Origin Energy’s target price was upped to $19.00 from $17.50 after revising near-term earnings forecasts upon changes to the oil price and currency outlook. The broker said the impact of higher oil prices will be largely offset by the higher AUD, with EPS forecasts cut 1.2% in FY10 but raised 0.8% and 1.8% in FY11 and FY12 respectively.
Coal – A commodities report from Macquarie Group described the coking coal market as tight, with spot prices edging upwards in increments on the back of strengthening demand, decreasing coke stocks, and ongoing logistics constraints. The broker said 2010 looks set to be a very strong year for the sector. While China is no longer importing coking coal at 55million tons/year (the rate they were producing at during mid 2009), levels haven't dropped below 30 million tons/year in recent months. Macquarie expect China to continue to import hard coking coal material through 2010 at similar levels to current, given the ongoing steel production growth, which should be matched but not exceeded by higher output from Shanxi mines. The seaborne supply chain is under pressure to deliver growth (although the capacity of market to do so is limited) with the short-term focus on Australia and the US to push more material through the ports. Macquarie Group believe that an extra 12 million tons of Australian and 10 million tons of US material can be realised, however the logistics chain will be extremely tight under this situation and subject to disruption from unforeseen events. They reiterated their forecast of $180/ton for 2010-11 contract hard coking coal prices. Miners to benefit include BHP Billiton (through its BMA joint venture), MacArthur Coal and Xstrata.
Base metals – In a research report from Macquarie Group China copper imports during 1Q 2010 are expected to reach 800,000-850,000 tons vs around 620,000 tons during 4Q 2009, based on relative strength of prices in China to LME triggering strong imports of metal. The broker notes Shanghai Futures Exchange 3-month copper prices are $170/ton above 3-month LME copper prices and said the positive arbitrage has been in place for the past month-and-a-half. The Shanghai Futures Exchange outperformance reflects more robust requirements from ongoing government fiscal stimulus packages supporting strong demand among home appliances and the auto industry. Macquarie also expects Chinese refined net zinc imports to be strong during 1Q.
Lihir Gold – The surprise departure of CEO Arthur Hood this morning has sparked speculation the resignation could be linked to the company’s acquisition of Ballarat Goldfields in 2007, which turned out to be a poor choice. The Ballarat mine is currently up for sale after disappointing results. In a note from Credit Suisse, investors are unlikely to take the departure negatively given 2009 production has been confirmed in line with guidance. The broker believes Lihir has carried the risk of further acquisitions, diluting investors' exposure to flagship Lihir mine. Under Mr Hood's leadership and the Chairman Ross Garnaut, acquisitions have destroyed shareholder value. This risk may now have changed but we would like to see changes at board level before becoming too confident. Credit Suisse kept their $3.00/share target and ‘underperform’ rating. Our constrained outlook for the gold price during 2010 limits the potential of Lihir Gold but it remains a clean gold price exposure for believers in the metal.
IOOF Holdings – IOOF Holdings is up 6.3% at midday amid speculation that they could become a takeover target, after the Age newspaper reported over the weekend that IOOF has held preliminary talks with ANZ Bank. While there seems to be some scepticism, a number of analysts see merit in a deal, which report says could be funded through a combination of cash and shares.
Overnight Market Report - 9.00am
US markets finished the week with falls on Friday as a weaker-than-expected University of Michigan Consumer Sentiment report and disappointing numbers from JPMorgan left investors unsure about whether stocks can build on the nearly 1 year old rally.
The tech heavy NASDAQ lost 1.2% while the S&P 500 was down 1.1%. The Dow Jones Industrial Average gave up 0.9%.
JPMorgan is seen as a real bellwether, partly due to their conservative management style. Investors were spooked by JPMorgan’s announcement of their first quarterly loss since 2008 for their retail unit and the boost in reserves for consumer loans.
So far earnings have been a real mixed bag. I think investors are getting disappointed because there is a real lack of clear direction. From what we have seen, it certainly looks like the expectations bar has been set pretty high.
Turning our attention to the new week, SPI futures are calling the Australia 200 CFD Index to open 0.8% lower at 4861.
Most of the today will be focussed on the financials space, and in particular, the big four banks following Commonwealth Bank of Australia’s substantial profit upgrade late Friday. However, sector leads from the US are poor as the financial sector was the worst performer, down 2%.
Despite this, we should see significant follow through buying today as nobody had time to trade following the result on Friday. We’re expecting the banks to easily outperform their overseas peers to support the overall market. We must remember the big four banks hold a 24% weighting.
Elsewhere, all sectors in the US came under pressure so the financials aren’t likely to get much upside help. BHP Billiton and Rio Tinto were both down 1% in London while base metals on the London Metals Exchange were mostly lower since our 4pm Friday close. Crude Oil and gold futures were both softer as well, losing 1.4% and 0.7% respectively.
On the whole, it’s going to be a real tug-of-war between stronger financials and a weaker overall market. Will financial gains be enough to push the market into positive territory?
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