20/01/10 - 15:30
Ben Potter - Research Analyst, IG Markets
Afternoon thoughts from the Trading Room – 3.30pm
Across Asia, regional markets are mixed as weaker financials offset gains among Japanese exporters and commodity based stocks. Also, reports from China, that they have asked certain banks to stop lending for the remainder of the month, have caused concern. The Hang Seng and Shanghai Composite are lower by 1.2% and 1% respectively while both the Nikkei and Kospi are stronger, up 0.4% and 0.3%.
Further south, the Australia 200 CFD Index is 0.2% firmer at 4869.2 after trading as high as 4905.8 this morning. The market got off to strong start with both the heavily weighted financials and materials adding significant points.
The reports from China sent traders in the materials space scurrying around midday, with the ASX 200 losing roughly 30 points over the course of an hour.
Chinese regulators asked some of the nation’s banks to limit lending after they failed to meet requirements including those for capital, said Liu Mingkang, chairman of the China Banking Regulatory Commission. The CBRC hasn’t asked all Chinese banks to halt lending. “We have a number of regulatory requirements to ensure prudent supervision,” Liu said in an interview in Hong Kong today. “For those that failed to meet these standards, we told them to limit lending.”
The materials sector was hit hard by these reports. It’s another sign the Chinese economy is running at full steam. Obviously attempts to slow it will be met by short-term weakness but in the long run, this should be seen as a positive as it helps prevent the economy from overheating and asset bubbles from forming.
Market Update from the Trading Room – 1.30pm
Australia 200 CFD Index: 4881 (+0.4%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Industrials | 1.3% | Information Technology | -0.8% | |
| Telecommunications | 1.2% | Energy | 0.1% | |
| Utilities | 1.1% | Healthcare | 0.4% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| BHP Billiton | 5.0 | Westpac Banking Corporation | -1.7 | |
| ANZ | 1.6 | Alumina | -0.4 | |
| Westfield Group | 1.5 | Computershare | -0.3 |
Economics – Westpac’s Consumer Confidence jumped 5.6% in December, defying history that usually suggests confidence falls after the RBA starts a rate hike cycle. In a note from UBS, the rise (the strongest in 6 months) makes a 25-basis-point hike next month even more likely. The RBA next meets on 2 February and the majority of analysts are expecting a fourth hike since tightening began in October. UBS believes the rise in confidence suggests the level of the cash rate remains stimulatory enough to boost confidence, given the improving circumstances of the economic backdrop.
Macquarie Airports – The recovery in traffic at airports continues with international traffic rising 11.4% in December from a year earlier with total traffic up 8% for the month. Traffic at Copenhagen airport rose 3.9% for the same period. The only laggard was Brussels airport, where traffic fell 1.1% as heavy snow falls affected operations late in December. In a note from Macquarie Group, they retained their ‘outperform’ rating and $3.40 price target following the results. The broker said Macquarie Airports is in a sweet spot, with a strong Australian economy fuelling airlines to grow capacity, while Sydney's international terminal upgrade is coming on-line. Macquarie Group believes this is an ideal situation to capture the passenger leverage. We anticipate a further 0.7x will be added to the EV/EBITDA multiple, bringing the equity rating back to levels seen in 2007. The expansion reflects confidence in the outlook, and that Macquarie Airports has delivered a predictable earnings stream during the cycle.
BHP Billiton – In a report from Morgan Stanley, BHP Billiton’s production report was noted as reasonably strong overall and a higher than expected proportion of iron ore spot sales was as positive. BHP said 54% of its Australian iron ore in the first-half was sold at benchmark prices with the remainder sold on shorter-term reference pricing (a mix of spot and indexed sales). Morgan Stanley said the higher spot sales are due to the strength of demand; with spot prices well above benchmark prices. Analysts will be reviewing their forecasts for earnings from BHP's iron ore division. The proportion of spot sales is above market anticipation, so we think that is where people will really have to focus their attention.
Also, in a note from Macquarie Group, they indicated production volumes at most BHP Billiton businesses were better-than-expected in 2Q10. Petroleum was 2% better, iron ore was 3.5% higher and nickel 29% firmer. Copper and metallurgical coal production was lower than forecast but sales have held up with BHP Billiton drawing on inventories. Macquarie Group notes the about 46% of BHP’s Pilbara iron ore sales on short-term reference pricing, gives it a significant advantage over its competitors and is higher than Macquarie's estimate of 30%. Such developments will put real pressure on those ‘sticking with' the benchmark system. Macquarie Group maintained its ‘outperforming’ rating with a $45 target price.
JB HiFi – In a report from UBS, JB HiFi price target was upped to $24.25 from $21.50, on anecdotal evidence suggesting sales momentum has remained strong, citing the switch to digital TV from analog in Australia and the store roll-out program. UBS said despite JBH's challenging valuation (stock is trading around 20x FY10 price-to-earnings ratio), they maintain their ‘buy’ rating with the following in mind: Store roll-out program dilutes macro related risks with scope for upside from increased operating leverage and; increasing scope for capital management in the form of a special dividend and/or an increase in the targeted 50% payout ratio.
Computershare - Computershare's earnings pre-announcement that 1H management earnings per share should be up 20% on year has inspired a raft of price target increases. Citigroup raised their price target to $12.55 from $11.29; Credit Suisse to $14.29 from $13.99; Deutsche Bank to $12.00 from $10.50. However, Credit Suisse cut their rating to ‘neutral’ from ‘outperform’, due to the group's outperformance of S&P/ASX 200 by 7% over the past week and 13.5% over the past quarter. Credit Suisse sees continued medium-term upside for Computershare from: positive exposure to global corporate actions activity (IPOs, M&A and further capital raisings from the financial sector); incremental bolt-on acquisitions; and a continued focus on cost controls, supportive of margin expansion. Deutsche Bank said Computershare has clearly benefited from a pickup in secondary market activity and the rebound in the Hong Kong IPO market. However, they feel it's hard to see how Computershare's earnings will continue to outpace the broader market.
Lend Lease Group - Lend Lease Group confirmed this morning they has been selected by Western Australia as the preferred developer of the first stage of 710-hectare Alkimos coastal development. The development agreement is expected to be finalised within about three months. The development of the initial 224 hectare stage is expected to start in 2011, and will include about 2,500 dwellings. The expected end-development value of more than $400 million will be delivered over seven years. Whole 710 hectare community has 20-year delivery timeframe. The project will operate under a land management agreement, with Lend Lease expecting to make a capital investment of about $20 million to establish project.
Overnight Market Report - 9.15am
In US trade overnight, the major indices had a strong session. They were boosted by a rally in healthcare stocks as traders bet that the outcome of a special election for the Massachusetts’ Senate seat might deal a setback to proposed health insurance reforms. Also, Treasuries fell and the US dollar index strengthened.
The tech heavy NASDAQ rose the most, finishing 1.4% higher. The S&P 500 added 1.3% and the Dow Jones gained 1.1%.
The rally was broad-based with all S&P sectors finishing in the black. The healthcare, technology and materials sectors were the strongest.
Heading into the New Year, there was some concern that a strengthening US dollar would pressure USD denominated commodities prices. However, despite a stronger dollar, fundamentals supporting underlying demand have emerged, spurring further buying, which is a very positive sign indeed. Many participants have been waiting for these demand fundamentals to appear.
Turning our attention to the Australian open, the SPI futures are calling the Australia 200 CFD Index to open 0.8% higher at 4900 even.
By all accounts, it looks like it’s going to be a positive session for the local market.
We should see some solid buying amongst the materials stocks as the S&P Materials sector in the US finished 1.6% firmer, boosted by stronger commodity and base metal prices. Also, both Rio Tinto and BHP Billiton in London added 0.2% and 0.3% respectively.
There should be some support for the financials too as the S&P Financials sector rose 1.3% in US trade after Citigroup gained following their Q4 result.
In economic news, Westpac Consumer Confidence is due at 10.30am.
Regular Feeds
Chris Weston, Market Analyst, is the face of our video market updates and presents live from our trading floor daily. His expert commentary can also be seen regularly on Sky Business channel, plus Bloomberg, ABC2, the Australia Network’s Business Today program and Yahoo Finance.
Plan your day
More in-depth market news is available within our PureDeal platform, as well as a range of free charting and research tools.
Disclaimer: The above material does not contain (and should not be construed as containing) personal financial or investment advice or other recommendations. The information provided does not take into account your particular investment objectives, financial situation or investment needs. You should asses whether the information provided is appropriate to your particular investment objectives, financial situation and investment needs. You should do this before making an investment decision based on the material above. You can either make this assessment yourself or seek the assistance of an independent financial advisor. IG Markets Limited accepts no responsibility for any use that may be made of these comments and for any consequences that result.