03/02/10 - 15:30
Ben Potter - Research Analyst, IG Markets
Afternoon thoughts from the Trading Room – 3.30pm
Across Asia, all regional markets are in positive territory, with gains led by material producers and energy stocks, after confidence was boosted by solid US pending home sales overnight. The Hang Seng is up the most, stronger by 1.3% while the Kospi, Nikkei and Shanghai Composite are firmer by 1%, 0.3% and 0.2% respectively.
Locally, the Australia 200 CFD Index is advancing by 0.7% at 4635, off morning highs of 4656. Gains are coming from those cyclical sectors leveraged to the global economic recovery. We see this as a positive as it may indicate a re-emergence of risk appetite.
Overnight gains in commodity prices have seen some of the heavyweight miners and energy names outperform for a second consecutive day. Whilst it’s positive to see further follow-through buying today, buyers seem to be lacking yesterday’s conviction. It looks like we’re seeing a few sellers return to the market, especially among the big four banks and defensive sectors.
It seems our major banks are still coming to grips with yesterday’s shock rates decision and the potential impact on their earnings prospects.
Tonight’s trading action will be crucial. Recent gains have been on lower volumes than the down days, pointing towards continued caution among participants.
Market Update from the Trading Room – 1.00pm
Australia 200 CFD Index: 4632.8 (0.6%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Materials | 2.4% | Financials | -0.5% | |
| Consumer Discretionary | 1.2% | Healthcare | -0.5% | |
| Industrials | 1.2% | Utilities | -0.4% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| BHP Billiton | 14.7 | Westpac Banking Corporation | -4.6 | |
| Newcrest Mining | 2.0 | ANZ | -4.3 | |
| Rio Tinto | 2.0 | Commonwealth Bank of Australia | -2.2 |
CSL – In a report from Royal Bank of Scotland, CSL’s target price was upped to $36.40 from $34.00 and reiterated their ‘buy’ recommendation. The broker believes CSL is a quality franchise with a number of growth drivers. In RBS’ view, increased demand from a number of new sources should continue to underpin medium-term IVIG volume growth. In addition, their analysis suggests there is upside risk to margins as the US recession eases.
Steel stocks – In a report from Royal Bank of Scotland, Australian steel stocks were moved to ‘overweight’. The broker said with the steel sector earnings moving past the cyclical bottom, PE multiples normalising, and valuations well below long-term averages, there is significant value emerging across the sector. They believe the potential for a rally in steel prices and a recovery in global demand could act as further catalysts for the sector. They also note that after the impact of a severe destocking cycle in early 2009, earnings in the steel sector have begun to recover. With demand steadily increasing, prospects for strong steel price increases, and improving margins, RBS see 2010 as the start of the earnings growth cycle. They continue to prefer stocks with the greatest long-term earnings recovery leverage, naming Bluescope Steel as their top sector pick, followed by OneSteel and Sims Group.
News Corporation – News Corporation jumped out of the blocks this morning after smashing Q2 market expectations on nearly all metrics. Whilst a profit upgrade was expected, the magnitude clearly surprised. FY 2010 operating earnings are now expected to grow in the low 20% range. Impressively, the full impacts of Avatar and an improving US advertising market are not expected to benefit the company until next quarter.
ROC Oil – ROC Oil has slumped this morning, down 28%, following news of a huge downgrade to reserves at Basker-Manta-Gummy. The first integrated full field reservoir simulation model resulted in estimates of proved and probable reserves being slashed to between 3 to 5 million barrels from the previous 18 million barrels. ROC believes the downgrade will reduce the group's 2P reserves by 20-25%.They will reveal the extent of the impairment associated with the downgrade in their results on February 25 and is reviewing their future plans for the field.
Housing stocks – In a broker report from UBS, Boral and James Hardie were upgraded to ‘buy’ from ‘neutral’. The broker believes that value is emerging after share price falls in January. UBS forecasts annual EPS growth of 25-35% from FY10 to FY13 for both stocks.
Crown – In a note from UBS, Crown’s target price was cut to $10.15 from $11.20 after expectations of a disappointing performance from their Melco JV when they reports earnings. UBS said given MPEL's balance sheet issues, Crown has various options relating to their MPEL stake. They believe Crown can add additional capital; continue to be diluted down in any potential MPEL raising; or exit their MPEL stake to a strategic buyer. Absent any strategic moves by Crown (given their already strong balance sheet) they could use any additional cash from an MPEL sale for a buyback.
Overnight Market Report - 9.00am
The rebound in global equity markets continued overnight as commodity prices rose, US pending home sales came in slightly stronger, and bellwether United Parcel Service topped earnings expectations. Also, the biggest ever gain in Brazilian industrial production in December helped boost investor confidence.
The broad-based S&P 500 was the best performer, adding 1.3% while the Dow Jones Industrial Average rose 1.1% and the NASDAQ 0.9%.
There are some signs that participants are beginning to look at fundamentals again. Underlying economic data and company specific earnings are very supportive. It’s just these political concerns and the Chinese stimulus withdrawal that has distracted investors’ attention.
Locally, SPI futures are calling the ASX 200 to open 1.2% higher after another night of strong gains in equity and commodity markets.
All sectors in the US closed in the positive with the healthcare and industrial spaces the best performers, up 2.1% and 1.9% respectively.
We’re likely to see another good day for our material names after base metals were all higher on the London Metals Exchange. Rio Tinto and BHP Billiton rose 3.4% and 2.7% overnight and the S&P Materials sector added 0.2%. A 1.1% rise in gold futures should see the gold miners well supported too.
We’ll likely continue to see a sharp rebound in our energy stocks today after Crude Oil futures rose 3.5% to $77.33 from 4.30pm yesterday and the S&P Energy sector gained 1.4% in US trade.
Financials should be well bid after the S&P Financial sector advanced by 1.1%.
In economic news, keep an eye out for the AIG services index at 9.30am, followed by our Trade Balance at 11.30am. Also, News Corporation posted a stronger-than-expected result this morning, so we may see their stock outperform.
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