27/01/10 - 15:30
Ben Potter - Research Analyst, IG Markets
Afternoon thoughts from The Trading Room - 3.30pm
Across Asia, equity markets are mostly lower as commodity based stocks fell for a ninth session. This came after China yesterday stepped up measures to curb economic growth. The Kospi, Nikkei 225 and Shanghai Composite are all down between 0.1% and 0.3% while the Hang Seng has managed gains of 0.8%.
Due to its huge resources exposure, the Australia 200 CFD Index is underperforming regional markets, currently down 1.7% at 4639.6.
Materials stocks are continuing to come under pressure today, grappling with the potential ramifications of China’s orchestrated moves to slow their economy. This is the eighth straight fall for materials names, and confidence is really beginning to suffer.
The fundamentals behind last year’s extraordinary gains for resource stocks remain intact, what seems to have changed is market sentiment.
The financials sector is struggling once again following some of the reforms proposed by the Obama Administration last week. With global financials now only just recovering from the GFC, these proposed changes could really crimp earnings and threaten their recovery.
The developments out of China and the US have clearly damaged the appetite for risk. And all this comes despite a very positive US earnings season, which has failed to register with investors who have been preoccupied by the above headlines.
Market Update from the Trading Room – 1.15pm
Australia 200 CFD Index: 4642.3 (-1.6%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Healthcare | -0.1% | Materials | -2.7% | |
| Property Trusts | -0.5% | Energy | -2.3% | |
| Utilities | -0.8% | Industrials | -1.3% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| News Corporation | 0.4 | BHP Billiton | -12.0 | |
| CSL | 0.4 | Westpac Banking Corporation | -6.9 | |
| GPT Group | 0.4 | Rio Tinto | -6.1 |
Economics – Fourth quarter Australian CPI was slightly above analysts' expectations, coming in at +0.5% on-quarter and +2.1% on-year; slightly above 0.4% on-quarter and +2.0% on-year that analysts expected. In a note from Nomura Securities, they said the stronger result increases speculation of a 25bp rate hike by the RBA next week. However, the broker is uncertain whether AUD gains will continue. They said they’re concerned about Chinese banking issues, as the Aussie dollar is very vulnerable to the China issue and investors' risk aversion.
Westpac-Melbourne Institute's November leading index rose at the highest annualised growth rate in two years, up 7.6%, giving the RBA one more reason to raise rates at next week's meeting. Westpac Chief Economist Bill Evans said "the evidence from the Leading Index- the Westpac Melbourne Institute Index of Consumer Sentiment- the labour market and recent trends in retail sales indicate that the Bank will be keen to move monetary settings back to a level where interest rates are no longer stimulatory for the economy."
AUD/USD – In a note from HSBC FX strategists, they picked the AUD as their favourite G-10 currency this year. A lot of the AUD's fortunes are pinned on the outlook for China, with its expansion continuing to fuel Australia's. The broker said as China grows and pushes up the price of commodities, there will be an improvement in the Australian terms of trade as export prices rise relative to import prices. All things being equal, this should then lead to an improvement in the Australian current account and a strengthening of the AUD.
Woolworths - Woolworth’s shares are down 1.9% after their 2Q sales rose 4.1%, marking a slowdown from a year ago when spending was boosted by the government stimulus package. The result was below analysts’ expectations of 5.9% rise. With prior period stimulus spending targeted at pensioners and low income earners, BIG W’s sales fell 0.3% in the latest period, while domestic food and liquor were more resilient, rising 5.9%. The supermarket giant stuck to its guidance given last year that it expects net profit to grow 8%-11% in FY10, sales to grow in upper single digits (excluding petrol sales) and EBIT to continue to grow faster than sales.
Base metals – In a note from a trader in Sydney, the mood in the base metals market is generally bearish on the back of a stronger USD and further news of monetary policy tightening in China. Market participants also continue to worry about the US's plans to rein in banks' trading activities.
CSR – CSR said it plans to proceed with the demerger proposal rather than tango with Bright Food Group over the Chinese company’s expression of interest about buying CSR for up to $1.5 billion. After talks last week, during which Bright Food presumably could have firmed up its offer or intentions, CSR said it will only progress any transaction alternative to demerger "if such transactions have a sufficiently high degree of certainty as to value, timing and likelihood of completion." In a statement from CSR, they said “if Bright Food wants to engage, it has to satisfy CSR that its proposal is "clearly superior to the demerger in terms of shareholder value."
Coal stocks – In a note from Citigroup, target prices for Australian coal stocks were boosted on upside to prices. However, Riversdale Mining was downgrades to ‘hold’ from ‘buy’ following recent share price movements. The broker said the recent rally in coal prices, driven by strong Asian demand coupled with supply side restrictions, shows there's upside to their short and long-term coal forecasts. Whitehaven is Citi's pick of the sector for solid production growth, sensible acquisitions and clean share register. The broker rates it a ‘buy’ with its target price lifted to $6.00 from $4.50. Centennial target was upped to $4.25 from $3.60 and its ‘hold’ rating maintained. Macarthur Coal was also kept at ‘hold’, with its target upped to $11.75 from $10.00.
Overnight Market Report - 9.15am
In the US, a late afternoon selloff, led by financials erased all of the session’s gains. This was despite a bigger-than-expected rise in the Conference Board’s confidence gauge to the highest level in more than a year.
The broad-based S&P 500 was the biggest decliner, finishing down 0.4%, while the NASDAQ lost 0.3% and the Dow Jones Industrial Average was flat.
With the US consumer accounting for approximately two-thirds of US spending, it’s certainly a positive development to see confidence return. However, there is still a long way to go before one could say the US consumer is back to its former self.
In Australia, the SPI futures are calling the Australia 200 CFD Index to open 0.1% lower at 4656.
The financial sector was the biggest drag in the US, losing 1.8%, so we are expecting to see our big banks under significant pressure today, as they’ve been in recent days.
Leads for the materials sector are mostly bearish this morning. Despite modestly higher base metal prices, Rio Tinto and BHP Billiton in London fell 1.1% and 0.9% respectively. This carried through to US trade where the S&P Materials sector dropped 1.4%. Hence we’re expecting the big materials names to detract points today.
On the economic news front, the much anticipated CPI data is due for release at 11.30am. Expectations are for growth of 0.6%. A weaker-than-forecast result could see the RBA pause next week. Having said that, inline or higher-than-expected would almost certainly lock in a rate rise.
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