21/01/10 - 15:30
Ben Potter - Research Analyst, IG Markets
Afternoon thoughts from the Trading Room – 3.30pm
In Asia, regional markets are mostly lower this Thursday after Chinese one-year swap rates rose after China announced its economic growth rate accelerated to 10.7% in Q4 2009 (the fastest pace since 2007). The Hang Seng is the biggest decliner, down 0.9%, while the Korean Kospi is weaker by 0.3% and the Shanghai Composite is 0.1% lower. Japan is managing to buck the trend to be up 0.5%.
Further south, the Australia 200 CFD Index is 0.6% softer at 4838.8 after trading as low as 4822.2 this morning. Those sectors leveraged to China and commodities are detracting the bulk of the points today, namely the energy and materials sectors.
Caltex & Oil Search are really weighing on the energy sector while gold miners, Lihir Gold and Newcrest Mining, are among the biggest losers in the materials sector. Diversified giant Rio Tinto is down heavily too.
There’s two sources of concern at play here – worries over China’s growth rate and the prospect of a disappointing US Q4 earnings season.
It is not surprising to see the materials and energy names selling off today, after the over-played lending concerns emanating out of China. Unfounded apprehension about China’s growth (and the 10.7% GDP print supports this) saw some of the froth come out of the commodities trade, to the benefit of the USD, and to the detriment of those names leveraged to the global recovery story.
In our opinion, the “Chinese lending concern” sell- off in global markets yesterday was a massive and unwarranted over reaction to what should have been seen as a prudent government initiative. Are we a slow learning society? Surely we have learnt from recent mistakes and now understand that rampant growth and unchecked capitalism are what ultimately led to the financial crisis we are now only just emerging from. China’s steps to temper inflationary pressures and prevent the creation of asset bubbles should be seen a positive move to achieving sustainable growth.
On the earnings front, companies seem to be meeting or beating expectations. Last year, share prices reacted to earnings reports whereas this year, prices have pre-empted earnings. Hence the reason why earnings reports are having to justify current prices.
Market Update from the Trading Room – 1.00pm
Australia 200 CFD Index: 4849.6 (%)-0.4%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Telecommunications | 1.5% | Energy | -1.6% | |
| Healthcare | 0.3% | Materials | -1.6% | |
| Utilities | 0.1% | Property Trusts | -1.0% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| Commonwealth Bank of Australia | 3.6 | BHP Billiton | -7.9 | |
| Telstra | 2.9 | Rio Tinto | -2.8 | |
| Westpac Banking Corporation | 1.9 | Newcrest Mining | -2.1 |
BHP Billiton – Analysts upped forecasts for BHP Billiton following their 2Q production report featuring higher spot iron ore sales and a US$467 million copper provisional pricing gain. Citigroup increased their 1H10 earnings estimate 7% to US$5.5 billion and indicated BHP is now their preferred pick of diversified miners for production growth and potential share buyback. Citigroup maintains their ‘buy’ rating with a $45 price target. Deutsche Bank said “higher iron ore spot sales and copper price adjustment boosts FY10 EPS by 7%” but kept BHP at ‘hold’ with $44 target. GSJBW said “BHP's 2Q production was very strong compared to forecasts and together with tax benefits and iron ore pricing, results in 7% upgrade to FY10 earnings”. The GSJBW broker also notes a buyback is likely in the next year given capex spend and iron ore JV payment due to Rio Tinto. Royal Bank of Scotland said “2Q output mixed but FY10 earnings boosted about 4% on iron ore, petroleum and copper price adjustment”. RBOS maintained their ‘buy’ recommendation and upped their price target to $51.05 from $50.37.
Base metals – In a note from a Sydney trader, base metals are on the back foot after an extending price fall overnight. This was triggered by another move from China to tighten monetary policy, fuelling worries about the demand from China and the global economic recovery. A weaker EUR/USD is adding to the selling pressure as well. US dollar strength was also supported by further doubts that US president Obama's healthcare plan will be passed after Republican wins the senate seat in Massachusetts (lessening the chance the proposal will add to US debt). Markets today are eagerly awaiting China 4Q GDP figures due at 1pm, as well as industrial production, consumer price index and producer price index. Consensus is for GDP growth of 10.8%.
OZ Minerals - OZ Minerals beat full year production guidance for their Prominent Hill mine on back of strong fourth-quarter output. 2009 copper output of 96,310 metric tons exceeded guidance for between 85,000 and 90,000 tons; gold production of 75,535 ounces topped forecasts for between 60,000 and 70,000 ounces. In their release, OZ Minerals said 4Q 2009 copper output of 36,497 ounces and gold production of 30,526 ounces beat expectations and they now believe they can run their processing plant consistently above nameplate capacity at 8.8 million tons per year. This leads to guidance for annual production of between 100,000 and 110,000 tons of copper and 80,000 and 90,000 ounces of gold in 2010, 2011 and 2012. The continued strong performance at the mill is a positive for OZ Minerals. Full year production figures while good, are not a surprise as the miner flagged in November they were on track to beat guidance.
CBH Resources - CBH Resources is up more than 18% after announcing a joint venture agreement with their largest shareholder, Japan's Toho Zinc. The deal is for a 50-50 JV on zinc-lead Rasp project and a share placement, valued at $67.5 million, which will substantially clear debt. CBH said the proposal is superior to the takeover offer from Belgium's Nyrstar, valuing CBH at $220 million. But CBH left the door open for Nyrstar to up their 13.5 cents share offer, and offered to buy 75% of CBH convertible notes valued at $98 million. "This endorsement (of the Toho Zinc deal) is subject to the emergence of a superior transaction or proposal", the miner said.
Santos – There were no big surprises in Santos’s 4Q production revenue numbers, with output in line with guidance, annual revenue slumping 21%, and 4Q revenue down 7% on lower average oil price. Gas prices in 4Q were down 16% due to oil price-linked gas sales contracts. As expected, Santos sticked to their 2010 production, capex guidance, and reiterated final investment decision for Gladstone LNG is due mid-2010. One unexpected positive was the reduction in production cost guidance for 2009 to $530 -$550 million from previous guidance of $550 -$570 million, due to cost efficiencies realized in 4Q and favourable forex impacts. Royalty related tax expenses for 2009 are also expected to be lower at $80 -$90 million from previous guidance of $110 -$120 million, although Santos says this is because 4Q oil prices were lower than anticipated.
Overnight Market Report - 9.00am
In overnight trade, major US indices retreated from their 15-month highs.
The indices gave ground as commodities tumbled, and the US dollar and Treasuries gained on concerns China’s latest move to moderate their economy will result in a slower economic recovery. Also, Q4 results from Bank of America and IBM weighed.
The Nasdaq was the biggest decliner, closing 1.3% lower while the Dow Jones Industrial Average and the S&P 500 both lost 1.1%. The afternoon’s rally for all the indices was very much a positive.
The whole response to China limiting its lending looks like a massive overreaction to us. Only 10 days ago China moved to raise banks reserve levels to slow lending growth. It’s hardly that surprising to see China imposing further measures when these reserve levels weren’t met. It’s probably in response to a massive surge in growth in Q4, which we’ll see today with Q4 GDP figures due for release.
China is trying to prevent inflation from becoming too much of a problem and avoid asset bubbles developing. Surely this is a positive for global markets and the recovery in the long run. It’s short-term pain for long-term gain.
Are we a society of slow learners? Correct us if we’re wrong but wasn’t rampant growth and unchecked capitalism one of the major causes of the crisis we’re only just emerging from.
China is seen as the beacon of global growth. Surely we want it to be sustainable. China’s move is likely to only have a short-term impact on sentiment. Once the markets realise that the Chinese are doing it for the long-term health of their economy, the buyers should return.
Locally, the SPI futures are calling the Australia 200 to open 0.7% lower at 4832.
The materials sector will be the major detractor today as base metals, commodities and the US Materials sector all saw strong selling pressure. Rio Tinto and BHP Billiton were down 4.3% and 3.6% in London.
Energy is unlikely to fare much better after Crude Oil futures fell more than 1.7% overnight to be trading around the $77.35 level.
On a slightly brighter note, we might see some support from the financials space as they were the best relative performer in the US, only finishing 0.1% lower.
Keep an eye out for Fortescue Metals Group’s production figures due today as well as the all important Chinese growth and production numbers due at 1pm.
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