29/01/10 - 15:30
Ben Potter - Research Analyst, IG Markets
Afternoon thoughts from the Trading Room - 3.30pm
In Asia, regional markets are mostly lower as the re-election of Ben Bernanke as Federal Reserve Chairman failed to inspire the market. Instead, concerns over Greece’s huge deficit and the US unemployment situation continued to weigh. The Kospi and Nikkei 225 are the worst performers, down 1.4% and 1.1%, while the Hang Seng is 0.3% lower. The Shanghai Composite is bucking the trend, up by 0.7%.
Further south, the Australia 200 CFD Index is 1.6% lower at 4599.3 after trading as low as 4584.1 earlier in the session. After yesterday’s strong buying, we were quite surprised to see support at 4600 break this morning. However, the market has recovered marginally and is flirting with the 4600 level.
The fact this support broke with such little resistance shows how negative sentiment currently is. We thought there would have been some buyers around the 4600 level.
A lot of people are confused and looking for a reason behind the selling, however sometimes there isn’t an obvious one. Markets can just fall under their own weight due to a lack of buying.
In the final quarter of 2009, there were growing calls from market participants for a meaningful correction, which did not eventuate. We may be seeing this play out now, giving those that missed the boat last time an opportunity to enter the market.
Market Update from the Trading Room – 13.30pm
Australia 200 CFD Index: 4587.4 (-1.8%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Utilities | 0.2% | Materials | -2.9% | |
| Healthcare | -0.1% | Information Technology | -2.4% | |
| Consumer Staples | -0.9% | Telecommunications | -2.0% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| CSL | 0.7 | BHP Billiton | -16.0 | |
| Foster's Group | 0.3 | Commonwealth Bank of Australia | -10.5 | |
| AGL Energy | 0.2 | Westpac Banking Corporation | -6.6 |
AUD/USD – In a currency note from the chief currency strategist at Commonwealth Bank of Australia, they said there are further signs of weakness as the Asian session continues. They attribute the decline to euro zone worries that have picked up recently, as well as month-end hedge rebalancing. "If you're an Australian offshore equity fund manager, you hedge using Aussie dollars. Given global markets have all fallen this month, they have to reduce their Aussie dollar hedge and sell Aussie to do that," they said.
Economics - Mortgage growth in Australia is showing little sign of cooling, with demand for loans continuing to grow at a strong pace in December. Policy makers aren’t likely to be overly pleased by the numbers, but with rates expected to go higher in coming months, the demand for home loans may ease. On-year housing credit growth of 8.2% in December is an illustration of the challenges facing the RBA when trying to head-off the risk of an asset bubble. The RBA meets next week and is expected to lift rates by 25 bps to 4.00%.
Macarthur Coal – The stock is down sharply after an update on its $668.5 million friendly takeover bid for Gloucester. Macarthur said its three-pronged transaction of Gloucester as well as assets held by Gloucester's major shareholder, Noble Group, was now scaled back after talks for a majority stake in Donaldson Coal Holdings stalled. However, talks to buy the remaining stake in the Middlemount Joint Venture progressed, with the stake valued at around $150 million. In a broker note from Patersons, they said the termination on the Donaldson negotiations means Macarthur will get fewer port and coal product diversification benefits from the transaction. Donaldson produces mostly thermal coal, which Macarthur lacks. Donaldson also has 11% stake in Newcastle Coal Infrastructure Group that would allow access to Port Waratah.
United Group – In a note from Macquarie Group, it was upgraded to ‘neutral’ with a price target of $14.80. The broker notes that United Group provides exposure to the expected US economic recovery via its US services business, which is 15% off earnings. They also note that the US facilities business has proven relatively resilient to the downturn, while the US property advisory business has been hit hard. The broker said at the same time, "we see less risk now of the AUD moving to parity as the USD is likely to recover over the next 12 months in line with an improving economic outlook".
Macquarie Group – In a report from Merrill Lynch, it was upgraded to ‘buy’ from ‘neutral’, with its target price upped by 16% to $70.00 from $60.60. The broker said payoffs from recent acquisitions as part of the reshaping of its business, improved market conditions and staff productivity should help improve its returns on equity. Merrill’s are comfortable Macquarie Group is now a cleaner play, while the lack of proprietary trading income and bank-holding company structure leaves us optimistic that Macquarie Group can navigate the new rules proposed in the US. The broker lifted EPS forecasts 8% in FY10 and 12% in FY11, and now expects around 30% annual EPS growth through to FY12.
BHP Billiton – The mining giant this morning approved the US$1.93 billion iron ore expansion for its Rapid Growth Project 6 in the Pilabara. In a note from Macquarie Group, they said they see this as a positive move. The broker said iron ore is one of BHP's best businesses, so "expanding in its own backyard", as CEO Marius Kloppers has referred to it as is a positive. Macquarie said BHP has a strong balance sheet and expects US$21 billion in capital outflows including capital expenditure, dividends, other projects this FY. Also, in a note from Royal Bank of Scotland, they said BHP is demonstrating a company that has a lot of cash and a lot of options on where to spend it to generate returns to shareholders.
Oil Search – In a note from JPMorgan, the energy player was upgraded to ‘overweight’ from ‘neutral’ and lifted its price target to $6.30 from $6.25. The broker said 4Q production was above expectations but Oil Search shares have performed poorly relative to energy peers recently. They also said while we share the negative outlook on global gas markets and LNG, we see PNG LNG as a de-risked project, further noting the project is fully contracted with customers, the final cost estimate is known and financing is arranged. While the news flow on further PNG LNG expansion may be long-dated, the broker believes this is low risk versus peers.
Overnight Market Report - 9.00am
On Wall St overnight, it was another victory for the bears as equity markets closed decisively lower, despite the re-election of Ben Bernanke as Federal Reserve Chairman. There weren’t a lot of obvious reasons for the selling, although you could find weakness among the durable goods orders, if you wanted to.
We think that is the key at the moment. The market is in an overly pessimistic mood and will find negative data if it desires. In bear markets, good news is ignored while negative news quickly inspires further selling.
The Nasdaq was the biggest decliner, down 1.9%, while the S&P 500 lost 1.2% and the Dow Jones Industrial Average fell 1.1%.
After months of calling for a decent pullback, the market seems to be obliging.
Locally, SPI futures are calling the Australia 200 CFD Index to open 1.4% lower at 4610.
Leads for the Australian market are pretty gloomy as all sectors in the US finished in the red. The S&P Materials sector was the second biggest faller, down 1.7%. Combine this with sharply weaker base metal prices and falls of 2.5% and 2.4% for Rio Tinto and BHP Billiton in London, we can easily see where the selling pressure is likely to come from.
The S&P Energy sector came under pressure too, losing 1.2%, so we’re expecting some weakness to play out here. Financials will weigh after further overnight selling, with the S&P Financial sector down 0.4%.
So, in summary it looks like another weak end to the week.
Please note, we see some upside risk to the opening call following strong after hours' results from Amazon & Microsoft.
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