25/01/10 - 15:30
Ben Potter - Research Analyst, IG Markets
Afternoon thoughts from the Trading Room – 3.30pm
In Asia, equity markets are all lower following Friday’s poor leads. However, nervousness over the re-appointment of Federal Reserve chief Ben Bernanke has been largely laid to rest, helping markets outperform US peers on a relative basis. The Hang Seng is the biggest faller, down 1.2% while the Nikkei, Shanghai Composite and Kospi are softer by 0.7%, 0.6% and 0.5% respectively.
Further south, the Australia 200 CFD Index is slipping by 0.9% at 4709.9 after trading as low as 4679.9 earlier this morning. As expected, the typically defensive telecommunications, healthcare and consumer staples sectors are outperforming. The materials space has proved very resilient too, only down 0.6% vs a 2% fall for the S&P Materials sector.
We’ve started to see buyers willing to step back into the market today, which is a very encouraging sign. Participants are starting to realise that the US concerns will have very limited impact on Australian firms.
This pullback has created a number of very attractive opportunities. From a valuations perspective, the market is back in line with the long running average. Judging by how some of the material names have fared today, traders are happy to buy the recent weakness.
The next two nights sessions on Wall St will be crucial in determining whether or not this is just a minor pullback or if sentiment has been damaged enough to see it continue lower.
Market Update from the Trading Room – 1.15pm
Australia 200 CFD Index: 4703.5 (-1%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Telecommunications | 1.0% | Financials | -1.6% | |
| Healthcare | -0.2% | Property Trusts | -1.3% | |
| Energy | -0.4% | Consumer Discretionary | -1.3% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| BHP Billiton | -8.4 | Telstra | 1.9 | |
| Westpac Banking Corporation | -6.9 | Incitec Pivot | 0.5 | |
| Commonwealth Bank of Australia | -5.7 | Alumina | 0.4 |
Copper – 3-month London Metals Exchange copper rose almost 1.6% on Friday night to US$7390 per metric ton, on the back of fund buying. In a note from Barclays Capital, copper is now hovering on confluence of support around the gap of $7,040 to $7,170, which ideally should hold firm early this week. If this gives way, Copper’s price will extend its bearish bias, possibly towards the $6,500 or lower. A rally to above $7,590 is needed to return focus to the topside, though they see this as an unlikely scenario this week.
Gold – In a note from Deutsche Bank, gold is likely to fall in the near term but they remain bullish on prospects for gold over the next 24 months. The broker also believes the recent moves by China to constrain lending to fight inflationary pressures could be viewed as negative for gold.
Woolworths – In a research report from Credit Suisse, solid 2Q sales are expected on Wednesday. The broker forecasts 5.5% comparable store sales growth in Australian food & liquor, 6.5% in consumer electronics and 4.0% in Big W. However, they cut their price target to $32.00/share from $34.00, saying a strong sales result could potentially signal a false dawn. Credit Suisse believes changing promotional behaviours in supermarkets and higher discounting in liquor has increased the potential for poorer profit leverage, with a bigger-than-usual risk of market downgrade to medium-term profit growth projections. Looking ahead, the next catalyst looms as Wesfarmers 1H profit report on February 18, which should provide further indication of industry margins ahead of WOW result on February 26.
Lihir Gold – In a report from UBS, earnings forecasts were lowered for Lihir Gold on higher costs. Net profit forecast for FY09 was cut by 3% and FY10 by 6%. The broker notes that 4Q09 gold production was in line with guidance but output in 2010 is likely to be impacted by maintenance at Lihir Island and Mt Rawdon. However, Lihir Gold looks relatively cheap compared to rival Newcrest Mining. UBS maintained their ‘buy’ rating with a $4 target price.
QBE Insurance Group – In a broker note from Deutsche Bank, QBE was downgraded to ‘hold’ from ‘buy’ after adjustments to currency forecasts saw a 3.7% cut to FY10 EPS forecasts for FY10 and a 4% reduction in the target price to $24.00 from $25.00. The broker said while QBE should remain a core portfolio holding, short of a major accretive deal in 2010, Deutsche Bank feels price upside is somewhat limited over the medium-term.
Banks – Following the planned legislation from the White House to tighten the leash on US banks, Deutsche Bank said "Whilst this legislation would have a material impact on some international banks if passed through the Senate, the actual impact on Australian banks is likely to be relatively small even if it is enacted globally. Australian banks do not own, invest or sponsor hedge funds in a meaningful way, nor do they undertake large proprietary trading operations outside of liquidity management. If similar legislation is introduced in Australia, the impact for Macquarie Group would be more significant, with the investment bank likely to be split from parts of the banking division".
Woodside Petroleum – In a report from UBS, Woodside Petroleum’s price target was lowered to $53.57 from $58.61 after re-working earnings forecasts. The broker lowered their 2009 EPS forecast by 12.6% after removing the forex gain on USD debt translation from underlying profit numbers. UBS said Woodside's 4Q09 sales revenue was 12% above their forecasts, with production in line. They maintained their ‘buy’ rating as Woodside has attractive drilling upside from their 20-plus well Greater Pluto drilling program, which is expected to run throughout 2010 and into 2011.
Overnight Market Report - 9.00am
On Wall St, stocks slumped for the third straight session as worries about Obama’s bank plan, China’s lending and uncertainty over whether Ben Bernanke will be re-elected as Federal Chairman weighed on the market.
The NASDAQ was the biggest decliner, down 2.7% while the S&P 500 fell 2.2% and the Dow Jones Industrial Average finished 2.1% lower.
As well as the Obama’s bank plan and Chinese concerns, the big worry was the uncertainty hanging over Bernanke. However, over the weekend there were a number of assurances from Republican and Democratic lawmakers, easing some of the nervousness. Bernanke was one of the major reasons the market sank on Friday, so in light of these assurances, there’s a good chance of a bounce tonight.
This morning, the SPI futures are calling the Australia 200 CFD Index to open 2% softer at 4655.
In line with US trade, we’re likely to see broad-based weakness, after all sectors in the US finished lower. The financials were the biggest detractor, down 3.3% so expect the big four banks to drag early. However, at some point we’re going to see buyers step into the market as investors realise that the bulk of these concerns are entirely US specific.
The materials sector will likely drag as well, after a 2% fall in the US. Although, resources were well supported in London with Rio Tinto and BHP Billiton only down 0.1% and 0.4% respectively. Copper was the best performer among base metals, managing a rise of 1.6%.
Elsewhere, the energy sector will probably see further selling pressure as Crude Oil futures fell 2.4% on Friday to be currently trading at $74.09 per barrel.
Today’s Producer Price Index due out at 11.30am will be eagerly watched, along with Wednesday’s CPI. The readings will likely confirm that interest rates will rise for a fourth straight month next week.
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