05/02/10 - 15:30
Ben Potter - Research Analyst, IG Markets
Afternoon thoughts from the Trading Room – 3.30pm
In Asia, regional markets have slumped after concerns over European sovereign debt and an unexpected increase in US jobless claims saw markets pummelled overnight. This trend has continued in Asia with the Kospi hit the hardest, currently down 3.4%. Elsewhere, the Hang Seng, Nikkei and Shanghai Composite are lower by 3%, 2.7% and 1.6% respectively.
In Australia, it’s an ugly picture. The Australia 200 CFD Index is 2.5% weaker at 4507, oscillating around the crucial 4500 level. The cyclical sectors like materials, energy and financials are doing most of the damage as investors offload anything associated with risk.
Yesterday, we asked whether it would be the bears or the bulls who would take control of the market. Clearly, the bulls gave up the fight very easily, sending global markets spiralling down.
Price action is looking increasingly bearish as markets are now making lower highs and lower lows on decent volumes. Psychology has changed with traders now looking to sell rallies, rather than buy dips.
The market is a supply and demand game, and at the moment supply is outweighing demand, for whatever reason.
Although many are calling the market ‘cheap’ on valuation grounds, this doesn’t necessarily mean it’s going up anytime soon. This will not come until the demand from value driven buyers exceeds supply. The question is, at what point does this occur? Is it 4450 or 3850?
At the moment, much like the bear market, participants are not interested in hearing how ‘cheap’ something is on a valuation basis.
Market Update from the Trading Room – 1.00pm
Australia 200 CFD Index: 4494 (-2.8%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Healthcare | 0.5% | Property Trusts | -4.2% | |
| Telecommunication | -0.7% | Materials | -4.1% | |
| Information Technology | -1.0% | Energy | -3.7% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| CSL | 0.6 | BHP Billiton | -23.4 | |
| ResMed | 0.3 | Westpac Banking Corporation | -8.6 | |
| Foster's Group | 0.2 | Westfield Group | -7.8 |
Economics – In a note from JPMorgan, it believes an interest rate hike from the RBA won't be coming in March, even if economic numbers continue to point to one. The broker said it's not financial market jitters or sovereigns that kept them on hold; it's about getting clarity before more rate hikes. Given this, JPMorgan doesn’t think the RBA can just roll out a rate hike in March. If that's what the RBA wants, they'll have to wait six or seven weeks until they get more information on consumers.
Bluescope Steel – In a broker note from Credit Suisse, FY10 net profit forecast was boosted to $151 million from the previous $121 million. This was on the back of revised forecasts for iron ore, coking coal, scrap and steel prices. However, FY11 estimates were trimmed to $507 million from $530 million and FY12 forecasts to $738 million from $763 million. The broker kept its ‘outperform’ rating on the stock, with a price target of $3.73.
OneSteel – In a broker report from Credit Suisse, the stock was upgraded to ‘neutral’ from ‘underperform’, with OneSteel’s target price increased to $3.65 from $3.26. This was after upgrades to iron ore, coking coal and scrap and steel forecast prices for 2010. The broker notes that while OneSteel offers strong leverage to rising raw materials costs, steel prices should also rise to recover the global average cost impost. Given this, OneSteel should enjoy ‘double leverage' with steel making margins and iron ore margins expanding.
Harvey Norman – The retailer is firmly in the red this morning, down more than 3%after saying 2Q sales in Australia rose 6.8% from a year ago. On a like-for-like basis, Australia sales rose 6.5% during the quarter. That's a pretty encouraging sign for the retail sector after both Woolworths and Myer reported disappointing results for the same period, which covers the key holiday shopping season. It appears investors were hoping Harvey Norman would upgrade their guidance but that wasn’t the case. Rather, management reiterated expectations for pre-tax profit to rise by more than 40% for the six months to December 31. With strong sales but no upgrade to earnings guidance, the question of how margins are holding up remains. Myer said discounting was deeper than usual during the holiday season, but Harvey Norman didn't comment on that issue in its results.
Ansell – In a note from Macquarie Group, Ansell was upgraded to ‘outperform’, with a price target of $11.57. The broker believes Ansell looks set to beat expectations this reporting season with better-than-expected volumes and margins across most of the portfolio (excluding customer), as well as its ability to mitigate the effects of large price swings in raw materials.
Overnight Market Report - 9.00am
Stocks plunged globally overnight, with the S&P 500 falling the most since April last year. This was amid new signs European governments are struggling to finance their debts and an unexpected increase in US jobless claims rocked confidence. The Euro fell to its lowest level since May and commodity prices were smashed as well.
The broad-based S&P 500 index dropped a whopping 3.1% while the Dow Jones Industrial Average fell 2.6% and the tech laden Nasdaq lost 3%.
We’re seeing a massive unwind of the global carry trade as investors’ appetite for risk plummets. It seems the problems in Europe are only deepening, with concern over Portugal and Spain growing rapidly as the ECB prepares to start removing liquidity programs. People are asking whether or not these countries can stand on their own two feet.
Locally, we’re calling the Australia 200 CFD Index to open 2.6% lower at 4499. We’re expecting to see widespread selling as all sectors in the US were down more than 2%. It’ll likely be exaggerated by people exiting the market before the tonight’s non-farm payrolls and ahead of the weekend.
The financial sector is likely to see heavy selling after the S&P Financial sector and KBW Banking index were the biggest decliners, both losing 4.3%.
The S&P Energy sector was only marginally better, lower by 4.1% after Crude Oil futures slumped nearly 5% (the most in six months), as the European concerns fuelled worries over the demand outlook. Since 4.30pm yesterday, Crude Oil futures are down 5.1% at $73.06.
Global leads for the materials sector were very bearish too. Base metals on the London Metals Exchange were sold aggressively, with copper, zinc, nickel and aluminium all down between 2.1% and 3.7%. Gold futures fell nearly 4% while Rio Tinto and BHP Billiton were weaker by 3.3% and 2.7% in London trade. The US materials sector was off 3.7%. BHP Billiton’s ADR is calling it to open at $39.60, retreating roughly 3.6%.
So overall, we’re looking at a very bleak end to the week.
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