04/02/10 - 15:30
Ben Potter - Research Analyst, IG Markets
Afternoon thoughts from the Trading Room – 3.30pm
Across Asia, regional markets are all lower this Thursday after overnight falls in the US, weakness among commodities, and worse-than-expected Australian retail sales data. The Hang Seng is the worst performer, falling 1.5% while the Nikkei, Shanghai Composite and Kospi are down 1%, 0.6% and 0.4% respectively.
Locally, the Australia 200 CFD Index is 0.8% softer at 4610.5, off morning highs of 4640. The bulk of the points are coming out of the materials, consumer discretionary and financial sectors following weak US leads.
Also, this morning’s lower-than-expected retail sales numbers put a dampener on retail stocks, with Myer, David Jones and JB Hi-Fi all down between 2.3% and 3.3%.
It really looks like the Australian consumers have tightened their belt following the three interest rate rises. While official rates have only risen by 75 basis points, we must remember that the average Australian mortgage has probably gone up by roughly 90 basis points –hence it’s hardly surprising we’ve seen a drop in consumer spending.
Whilst the market is down today, it’s a positive that the bears haven’t been able to take complete control. It looks like the market wants to consolidate after the recent bounce and ahead of tomorrow night’s US employment numbers.
Cyclical names led the two-day advance, however, they’re taking a breather today with defensive names coming to the fore. The next two sessions will help determine whether cyclicals resume their longer term uptrend or are still amidst a pullback.
Market Update from the Trading Room – 1.00pm
Australia 200 CFD Index: 4604 (-0.9%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Telecommunications | 1.1% | Information Technology | -2.2% | |
| Utilities | 0.5% | Materials | -2.0% | |
| Consumer Staples | 0.1% | Consumer Discretionary | -1.5% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| Telstra | 1.9 | BHP Billiton | -10.1 | |
| Woolworths | 0.9 | Commonwealth Bank of Australia | -3.6 | |
| Foster's Group | 0.8 | Rio Tinto | -1.8 |
Economics – Australian retail sales weakened in December, confirming fears that consumer demand was softer through the crucial sale period and likely affirming the RBA's decision this week to keep rates on hold. Retail sales fell 0.7% compared with an expected rise of 0.1% over the month. Coupled with weak anecdotes from major retailers, the Christmas period looks poor. However, November sales were revised up to 1.5% from 0.4%, which has contributed to a solid 1.1% increase over 4Q. The RBA is now likely to wonder if the December weakness is the start of a trend or a minor blip. If so, it could cancel any March rate hike.
Myer – Myer’s sales results painted a disappointing picture for the holiday shopping season, given the group said December like-for-like sales were negative in what it called a "very challenging pre-Christmas environment". Total sales for the second quarter were flat and Myer said discounting was deeper than it had been in recent years. It's bleak news for the retail sector but shouldn't come as a surprise as anecdotal evidence had pointed to this sort of result. Still, investors may be disappointed, given a poll of four analysts by Dow Jones had expectations for second-quarter total sales growth of 3.2% and like-for-like sales growth of 2.5%. Myer’s shares are trading 3.6% lower. On the upside though, management said first-half EBIT should rise by more than 10%, in excess of prior guidance for 5.6% growth. Management also said its store opening and refurbishment plans are on track.
CSR – CSR’s shares are down more than 6% this morning after a Federal Court judge rejected its demerger proposal. Those participants who bought into the stock to be part of the demerged sugar unit would be likely sellers today, after the court ruled CSR hadn't proven it could meet its asbestos liabilities if it split in two. CSR was hoping to continue funding its asbestos liabilities from independent building products and an aluminium business, but the judge said that plan left uncertainties for victims. CSR said it would update the market when it considered the legal and commercial aspects of the judge's decision. Meanwhile, China’s state-owned Bright Food, which announced last month a bid of up to $1.5 billion cash for the sugar unit said it remained interested in the sugar assets.
Karoon Gas – Karoon Gas’ shares have been hammered today after mixed drilling results from its key Poseidon-2 well. The well was intended to test the extent of the Plover geological formation. Gas flowed from the middle of three gas-bearing sand intervals, although the rate of 850 standard cubic feet per day wasn’t particularly strong. Karoon believes higher flow rates are achievable but it will need to get better flow rates from the next well, Kronos-1, to support theories it’s sitting on something big. Consequently, in a note from Macquarie Group, the stock was downgraded to ‘underperform’, with Karoon’s price target cut to $7.00. The broker said after two wells and two production tests, little is still known about Poseidon.
ROC Oil – Following yesterday’s huge resource downgrade, in a note from Goldman Sachs JBWere, ROC Oil’s shares were downgraded to ‘hold’ from ‘buy’ and its target price lowered to 55c from 88c. The broker believes the result reflects poorly on ROC's technical capabilities. Goldman’s previously had a ‘buy’ recommendation owing to ROC's relatively healthy balance sheet and its leverage to increases in the oil price. However, now Goldman can't recommend investors buy the stock, until the company formulates a coherent strategy and improves its decision making.
Overnight Market Report - 9.00am
Overnight, stocks in the US and Europe retreated on the back of US dollar strength, commodity weakness, and a slower-than-estimated growth in US service industries. On a positive note, the ADP payrolls report showed a loss of 22,000 private sector jobs, better than the 30,000 that had been expected.
The broad-based S&P 500 index was the biggest decliner, down 0.6% while the Dow Jones Industrial Average lost 0.3% and the NASDAQ finished flat.
After a strong two-day relief rally, the market seems to be treading water, seemingly waiting for the next catalyst to send it higher or lower. The recovery from the session lows was a positive. We could have easily seen the market roll over and the bears regain control.
Turning our focus locally, the SPI futures are calling the Australia 200 CFD Index to open 0.5% weaker at 4624.
Offshore leads are pointing towards some materials weakness for the first time in two days with base metals all lower on the London Metals Exchange. Rio Tinto and BHP Billiton were down 2.5% and 1.9% respectively in UK trade, while the S&P Materials sector closed 1.2% softer in the US.
Among energy names, we may see some selling after Crude Oil futures were marginally lower from 4.30pm yesterday. Also, the S&P Energy sector lost 0.9% on Wall St.
The financials will likely be one of the major detractors today after the sector finished 1.1% weaker in US trade, on the back of concerns the big banks might be forced to buy back some of the troubled mortgages from US insurers.
All in all, we’re looking for the market to move lower at the open. However, the emergence of bargain hunters will be seen as a positive sign.
In announcements today, building approvals and retail sales number are due out at 11.30am. Keep an eye on the likes of JB Hi-Fi, David Jones, and Harvey Norman as well as CSR, Boral, and James Hardie in the construction space.
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