27/11/09 - 15:30
Ben Potter - Research Analyst, IG Markets 
Afternoon thoughts from the Trading Room – 3.30pm.
Across Asia, equity markets are all lower following the shock news overnight that Dubai had asked creditors of ports operator Dubai World for a 6-month standstill on repayments on debts worth about US$60 billion. After falling 3.6% yesterday, the Shanghai Composite is only lower by 0.6% today, the best relative performer which should be seen as a positive. Elsewhere, the Nikkei 225 is down 1.8% while the Kospi is weaker by 2.5% and the Hang Seng 2.6%.
In Australia, the ASX 200 is down 2.5% at 4593.9, off earlier lows of 4564.1. We’ve seen widespread selling on large volumes as investors headed for the exit door. However, with relatively little actual exposure to Dubai, especially among the banks, we’re mainly down in sympathy. The financials, industrials and materials are detracting the bulk of the points.
At the end of the day, we’re talking about Dubai here. Yes, some of the big European and US banks are likely to have exposure to it but it's unlikely to ‘sink the boat’ so to speak, especially given what financials have been through over the last 18 months.
It’s not like this has just suddenly popped up either. Credit default swaps for Dubai have risen more than 80% in the last month so there have been plenty of warning signs for creditors.
The issue has certainly put some risk back into the market and in turn, seriously wounded investors’ risk appetite. In the last 24-hours, we’ve seen a lot of money flow out of the risk trades with emerging markets and high beta currency plays like the AUD and CAD coming under pressure.
However, it’s very hard to judge how this situation will play out. Was last night’s volatility exaggerated by a lack of market liquidity thanks to Thanksgiving Day or was it real? Tonight’s European trade and the half session on Wall St will be absolutely crucial in determining market sentiment and whether or not this is just a hiccup in the trend higher or the beginning of something more sinister.
Market Update from the Trading Room – 12.30pm
ASX 200: -2.4% at 4595.8
Major Movers
Top 3 Sectors
- Telecommunicatiosn: -0.4%
- Utilities: -1%
- Consumer Staples: -1.1%
Bottom 3 Sectors
- Financials: -3.2%
- Materials: -2.7%
- Property Trusts: -2.6%
Advancers (index pts)
- IOOF Holdings: 0.1
- Infigen Energy: 0.1
- Extract Resources: 0.05
Decliners (index pts)
- BHP Billiton: -17.9
- Commonwealth Bank of Australia: -11.5
- National Australia Bank: -9.8
Market – In a report from Southern Cross Equities, they said Dubai World's debt deferral is no different to a sovereign default. But despite negative implications for UK and European banks who lent heavily to Dubai, the broker points out that Australian banks have very little or no exposure to Dubai. Also, the broker sees it as a positive for Qantas and Asciano, as they previously faced stiff competition from Emirates Airlines and Dubai Ports. It believes Leighton’s will be the biggest loser as $900 million Al Habtoor acquisition now looks ill timed.
Leighton Holdings – Leighton Holding’s is down 3.2% this morning after Dubai asked creditors of ports operator Dubai World for a 6-month standstill on repayments on debts worth about US$60 billion and on concerns about further slowing in the Middle East construction market. In recent years, Leighton Holding’s has benefitted from the massive amount of construction growth across the region but recently its Dubai based partnership with Al Habtoor has seen some contract losses.
Gold – Despite a lack of liquidity due to the Thanksgiving Day holiday in the US, the Dubai World debt problems are likely to drive investors to gold as a potential safe-haven. A Sydney-based trader said “this kind of story would highlight gold as a safe-haven, and should be bullish for gold. But we won't really know how this will continue to play out until London opens”.
Foster's Group – In a report from JPMorgan, the broker upgraded Foster's Group to ‘neutral’ from ‘underweight’ and increased its price target from $5.60 to $5.90, citing the beverage maker's successful appeal in a tax assessment case and a stronger outlook for beer. The broker still believes there are considerable downside risks to consensus forecasts considering the ongoing troubles in the wine industry, which has been struggling under the weight of oversupply issues. The analyst notes improvements in beer market volume aids growth, but warns the gap between premium and mainstream beer pricing in Australia is shrinking while consensus forecasts for certain wine earnings metrics have yet to be adjusted.
Amcor –JPMorgan maintained its ‘overweight’ recommendation for Amcor, with a price target of $6.72 while in a report from Credit Suisse, the broker retained its ‘outperform’ rating and $6.50 price target. The broker noted that Amcor said it may sell a European flexible packaging plant to satisfy EU regulator's concerns about purchase of some of Rio Tinto's Alcan Packaging assets. The plant, one of Amcor's portfolio of 75 has annual sales of US$100 million, or about 2% of combined Amcor and Alcan's European sales of US$4.8 billion.
Virgin Blue – In a report from Credit Suisse, the broker upped Virgin Blue’s target price from $0.55 to $0.76 after upgrading earnings forecasts 17% on average following AGM comments that VBA will post a profit in 2010. The broker said this is a very strong outcome given V Australia remains loss-making. It believes there's a strong likelihood that US regulators will approve the JV with Delta and believes Virgin blue is well placed to secure increased share of Australian government air travel tender.
Overnight Market Report - 9.30am
With US markets closed for Thanksgiving Day holiday overnight, European markets fell the most in seven months following Dubai’s attempt to reschedule its debt by seeking to delay repayment. This rattled investors appetite for risk with London’s FTSE falling 3.2% and the Dow Jones Stoxx 600 Index in Europe losing 3.3%.
Given offshore leads, the S&P/ASX 200 is called to open 42 points or 0.9% lower at 4667.
Sector leads
Materials sector
Base metals were all sold off heavily overnight on the London Metals Exchange with Copper losing the most, falling 2.4%. Elsewhere, Nickel was down 2.3% while Aluminium fell 1.7% and Zinc 1.5%. In London, Rio Tinto and BHP Billiton were both down at 4.8% and 4.2% respectively.
Given the leads, the materials sector should see increased selling in Asian trade.
Energy sector
On the back of the turmoil in the Middle East, Crude Oil futures sold off. Since the ASX close yesterday, Crude Oil futures were 1.5% lower at $76.24. In London, the FTSE energy sector lost 2.7% with BP falling 2.7% and Royal Dutch Shell down 2.4%.
Given the bearish leads, we should see some weakness across our major energy stocks.
Financials sector
The FTSE Financials sector was down 5.6% with Barclays the worst performer, falling 8%. Standard Chartered and Lloyds were both lower by 5.8% while HSBC lost 4.8%
Given the sharply weaker leads, we’ll likely see a lot of selling pressure across the financials sector.
In summary, we should see significant selling across the Australian market today.
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