02/02/10 - 15:30
Ben Potter - Research Analyst, IG Markets
Afternoon thoughts from the Trading Room – 3.30pm
Across Asia, regional markets are all positive this Tuesday after US and European manufacturing data came in stronger-than-expected overnight and commodity prices rebounded. The Nikkei 225 is the best performer, adding 1.5%, while the Shanghai Composite, Hang Seng and Kospi are up 1.1%, 0.3% and 0.1% respectively.
Locally, the Australia 200 CFD Index is stronger by 1.4% at 4587.5, roughly ten points off the intraday high. It’s hardly surprising to see the materials and energy sectors adding the most points after the global rebound overnight.
While the bounce back is positive, it will take more than one day’s price action before we can declare the current downtrend as over.
There’s no doubt that the bears will try to sell into this rally, whether that’s tonight or in coming days. The key will be how easily the bulls roll over and how much lower the bears can drive prices.
We’re looking for a higher low as evidence of the bears losing control of the market.
Equity markets have reacted positively to the RBA’s decision to keep rates on hold, with the ASX 200 adding approximately 0.2% after the release of the announcement.
It seems the central bank could not bring itself to hike for a fourth consecutive time. We feel the RBA has acted prudently in raising rates aggressively, but is smart in now adopting more of a wait-and-see approach.
Comments that stimulus affects are fading and that banks have hiked in excess of the official cash rate have clearly hit home with the RBA.
This will certainly please Australian households and provide a more sustainable platform for consumer spending and hence economic growth moving forward.
Keep an eye on next weekend’s auction clearance rates.
Market Update from the Trading Room – 1.30pm
Australia 200 CFD Index: 4588.4 (1.4%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Materials | 3.6% | Information Technolgy | -1.1% | |
| Property Trusts | 3.2% | Healthcare | -0.9% | |
| Energy | 2.6% | Consumer Staples | -0.3% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| BHP Billiton | 17.5 | National Australia Bank | -0.9 | |
| Rio Tinto | 5.9 | Sonic Healthcare | -0.6 | |
| Westfield Group | 5.1 | Suncorp-Metway | -0.6 |
Economics – Australian Business Confidence slid in December from November, but remains above the long run average. NAB business confidence dropped 11 points to 8 as businesses were obviously hit by rising rates and the higher AUD. However, a bounce of 5 points in the labour market sub-index to 7 (its highest level since May 2008) shows managers are busy rehiring again.
AUD/USD – Before this afternoon’s interest rate decision from the RBA, the AUD/USD is slightly off its overnight highs as traders eye the 0.8950 level as either key resistance or support, depending on the outcome. JPMorgan noted, if the RBA hikes and are hawkish, we would expect some liquidity to come in around 0.8950 to 0.8970, to push the AUS/USD well above. But if the RBA statement is more wait and see, then 0.8950 will likely hold. Regardless of the statement, JPMorgan sees an initial jolt higher post a widely expected 25 basis point hike.
Base metals – In a note from Commonwealth Bank of Australia, the recent moves to tighten monetary policy in China (which have unsettled base metal markets) might temper the rate of economic growth and curb stock building of metals. The broker notes that China's PMI manufacturing eased in January to 55.8 but the level is still firmly in growth territory. CBA believe the most likely case will remain, that China will posts another year of strong growth in 2010, helping support base metals demand.
Material stocks – In a research report from Citigroup, Rio Tinto was upgraded to a ‘buy’ from ‘hold’. Other Australian miners were upped too after the broker boosted commodity price forecasts on global growth upgrades and strong Chinese imports. Citigroup upped 2010 forecasts for iron ore by 22%, thermal coal by 31%, aluminium by 16%, copper by 15% and zinc by 21%. This boosts earnings for Rio, with their target price upped to $85 from $83. Citi said the miner has undergone a stunning turnaround and may use some of their cash for small acquisitions like Ivanhoe Mines. BHP Billiton was kept at ‘buy’ with their price target upped to $50 from $45 and noted a buyback was possible. Fortescue Metals Group was upped to ‘buy’ from ‘hold’ with their price target upped to $5.60 from $4.10. Centennial Coal and Macarthur Coal were both upped to ‘buy’ from ‘hold’ with their targets unchanged at $4.25 and $11.75. Alumina was upped to ‘hold’ from ‘sell’ with their price target upped to $1.80 from $1.50.
Iron ore – In a research paper from Goldman Sachs JBWere, they believe seaborne iron ore spot prices are drifting lower and that trade may remain subdued in the short-term. With the Chinese Spring Festival just two weeks away and steel prices drifting lower, spot trade in iron ore is unlikely to pick up in the near term as buyers hold off until after the holiday. Spot prices have fallen more than 8% in two weeks.
Woodside Petroleum – In a broker report from Merrill Lynch, Woodside Petroleum was upgraded to ‘buy’ from ‘neutral’ with a $50.96 price target. The broker said although Woodside is expensive relative to peers, with a PE at 22 times, they believe the premium is justified, given the strength of existing LNG customer relationships, good growth track record, and the depth and quality of their conventional gas portfolio. Merrill’s believes the company has a consistent pipeline of high-impact exploration wells over the next several months. Combined, the broker sees potential for the company to prove up a multi-TCF (trillion cubic feet) resource pool within the Greater Pluto Area, which could pave the way for Woodside to take a larger equity stake in a second train at Pluto than our current 60% forecast.
Commonwealth Bank of Australia – In a note from Merrill Lynch, the focus in Commonwealth Bank of Australia's 1H result next week will be on the composition of earnings and the outlook, particularly around bad debts, margins, and the impact of potential regulatory changes. The group has already said their 1H cash profit is expected to be around $2.9 billion. The broker expects CBA to increase their interim dividend to $1.20/share from $1.13/year ago. Also, Merrills believes that consensus forecasts are "too harsh" on CBA's bad debt outlook, and tips a FY10 bad debt charge 14% lower than consensus.
Overnight Market Report - 9.00am
Overnight, stocks bounced on Wall St to start the new month on a positive note. Better-than-expected reports on personal income, manufacturing (in US, China & Europe) and Exxon Mobil boosted investor confidence.
The broad-based S&P 500 was the biggest gainer, rising 1.4% while the Dow Jones Industrial Average added 1.2% and the NASDAQ 1.1%.
The overnight bounce was clearly boosted by a short squeeze. A lot of participants have covered back and taken profits on their shorts. Sentiment is an amazing thing. One of the major concerns of late has been the pace of growth in China and the fear of more restrictive policies. However, something changed investors’ negative thinking overnight, with participants viewing the concerted strength in US, European & Chinese manufacturing as a positive and a sign the economic recovery is accelerating. Is this a legitimate change in sentiment?
Turning our attention to the local market, the SPI futures are calling the Australia 200 CFD Index to open 1.2% higher at 4580 after gains for all US sectors overnight.
The materials sector should finally see a strong session today as overnight leads were very encouraging. Base metals were mostly firmer in London, with Rio Tinto and BHP Billiton up 2.7% and 1.6% respectively. The S&P Materials sector was the strongest sector, rising 4%.
After a hiding in recent weeks, the energy sector should see some buying too as Crude Oil futures jumped more than 3% to be trading at $74.90, in turn driving gains of 3.3% for the S&P Energy sector. A better-than-expected result for Exxon Mobil also boosted the sector.
Financials are likely to be well bid today after a 1.7% gain in the S&P Financial sector.
The big focus today will be the RBA’s interest rate decision at 2.30pm. The expectation is for an increase of 25 basis points to 4%. It will be very interesting to see how the market reacts.
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