22/01/10 - 15:30
Ben Potter - Research Analyst, IG Markets
Afternoon thoughts from the Trading Room – 3.30pm
Across Asia, regional markets are all lower after President Obama gave markets more to worry about overnight with a proposal for wide sweeping changes to the big banks proprietary trading desks. The Nikkei is the worst performer, lower by 2.9% while both the Kospi and Hang Seng are down 2.5%. The Shanghai Composite is 1.4% softer.
Further south, the Australia 200 CFD Index is down 1.8% at 4739 after trading as low as 4716 this morning. It’s broad-based weakness across all sectors, with the materials, energy and financials detracting the bulk of the points.
Positive sentiment around the current iron ore negotiations hasn’t been enough to save the big miners today with Rio Tinto, Fortescue Metals Group, and BHP Billiton all down between 2.8% and 4.8%.
The Obama led proposed restrictions on big banks proprietary trading desks and their hedge fund/private equity involvement, clearly rattled the market as these have been significant avenues of growth for the banks over the last decade.
We see this as a US centric problem. And while our financials are down in sympathy today, it shouldn’t be too long before sanity prevails and Australian banks are traded on their own merits.
Also, there are signs that people might now be realising the reaction to “the Chinese lending concerns” was seriously exaggerated. This Chinese theme has seen materials stocks decimated this week. As more rational thinking returns, we could potentially see a strong rebound in sentiment and share prices in the coming weeks.
Market Update from the Trading Room – 1.00pm
Australia 200 CFD Index: 4736.3 (-1.9%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Telecommunications | -0.3% | Materials | -2.7% | |
| Healthcare | -0.3% | Financials | -2.2% | |
| Utilities | -0.6% | Information technology | -2.0% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| Cochlear | 0.4 | BHP Billiton | -18.5 | |
| James Hardies | 0.3 | Commonwealth Bank of Australia | -7.5 | |
| OZ Minerals | 0.2 | ANZ | -7.3 |
Lihir Gold – The gold miner posted full year gold production of 1.12 million ounces, up 27% on the year, to be in line with guidance for between 1 and 1.2 million ounces. 4Q09 production was 278,391 ounces, up 19% on 3Q09, thanks to a strong performance at Lihir Island. 4Q09 gold sales were 296,000 ounces at an average price of US$1,096 per ounce, delivering a healthy profit margin as cash costs were US$454 per ounce. Acting CEO, Phil Baker, said finding a replacement CEO after Arthur Hood's shock exit this week is expected to take a number of months. The fact that production was in line with guidance is positive but is unlikely to be a big driver for the stock.
Base metals – In a note from ANZ senior commodity analyst, Mark Pervan, the overnight pullback in base metal markets on concerns the Chinese government may further tighten monetary policy, after strong 4Q GDP growth, represents a prime bargain hunting opportunity for Asian players. From ANZ’s conversations with people in Shanghai, they're not concerned about the tightening or the potential for it. Lending this year is still set to be more than 50% higher than 2008. It'll be a bit lower than 2009, but still very healthy. There appears to be a "two-speed" market about interpretation of Chinese data, with Europe and the US reacting to headlines, without looking behind them too much. Chinese tightening is encouraging as it would help prevent another bubble environment from forming.
In response to President Obama’s proposed bank changes, he said it would likely have little impact on banks proprietary commodity trading activities. There might be some impact but it would be muted because large banks would simply move that business to another arena.
Woodside Petroleum – The oil giant came in a fraction short of their 2009 annual production guidance, with the natural resource decline at Stybarrow Oil field and the shutdown at Vincent Oil field after a fire kept output at 80.9 million BOE, compared to downwardly revised guidance in December of 81 million BOE. Woodside hasn't mentioned 2010 production expectations today, although last month they forecasted an output of 70 -75 million BOE. Woodside reported their Stybarrow Oil field will be shut down for 35 days in 1Q10 while the Vincent will operate under revised production constraints in 1Q10, due to a gas compression outage (which is expected to be re-instated in 2Q). The steep fall in annual revenue was due to the sharp fall in oil prices, although their fourth-quarter revenue was hurt by reduced sales volumes and currency movements. The Northwest Shelf 4Q revenue for LNG slipped 53% on year, despite slightly higher output. There were no major developments announced with LNG, with final investment decisions for Pluto 2 and 3 reiterated. Concept selection for Sunrise LNG was pushed back to the current quarter, but the East Timor government isn't making things easy by still insisting on the plant being located on its own shores.
Macquarie Airports – Their securities should be supported after strong 4Q earnings performance at Sydney Airport, with underlying EBITDA up 11.8% to $193.2 million, outstripping a 7.3% growth in passengers. Notwithstanding their prior year comparables are a weak starting point given the impact of the global financial crisis. In particular, if you look at international passengers, a year ago, the full year underlying EBITDA growth was 5.6% vs passenger growth of just 0.4%. This suggests effective cost cutting measures even as airport undertook some significant re-developments, particularly in international terminal retail areas.
Overnight Market Report - 9.00am
In overnight action, stocks plunged, erasing most of their gains for the year as President Obama proposed sweeping financial reforms to limit the risk-taking at large financial institutions. Also, Chinese concerns continued to linger.
The Dow Jones Industrial Average was the biggest decliner, down 2% while the broad-based S&P 500 fell 1.9%. The NASDAQ Composite outperformed, only falling 1.1%.
It was a two pronged attack overnight. Financials sold off heavily on concerns over an overhaul of financial services, with increased regulation hurting the bottom-line for banks. Materials were crunched on the continuing worries over China’s growth and the need for further stimulus removal.
On a positive note, the majority of Q4 earnings continued to meet or exceed expectations, although stock prices don’t reflect this. Sometimes, the market will go down on any news. This looks like one of those occasions. It is correcting and will see any news as negative. In the market’s eyes, the glass is half empty at the moment.
Down under, SPI futures are calling the Australia 200 CFD Index to open 2% lower at 4733. It’s going to be an ugly day’s trade with very poor leads for our two heaviest weighted sectors.
The S&P Financials sector was down 2.9%, so there is little hope for our banks today. Although, hopefully local investors will realise that Australian banks are in no way involved with Obama’s latest plans.
The materials sector is likely to get clobbered after the S&P Materials sector fell 4.3%. All the base metals in London were down between 0.1% and 2.1%, while Rio Tinto and BHP Billiton lost 5% and 3.1% respectively in UK trade. Gold slid another 1.6%.
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