11/02/10 - 15:30
Ben Potter - Research Analyst, IG Markets
Afternoon thoughts from the Trading Room – 3.30pm
In Asia, equity markets are all higher in early afternoon trade, led by gains among material and bank stocks after lower-than-expected Chinese inflation numbers and an increase in Australian jobs tempered concerns that tighter monetary policy will weigh on growth. The Hang Seng and Kospi are the best performers, both up 1.5%, while the Nikkei 225 and Shanghai Composite are higher by 0.3% and 0.2% respectively.
Locally, the Australia 200 CFD Index is 0.6% stronger at 4542.8, outperforming US leads, but off morning highs of 4565.3. Banks, miners and energy names are supporting the market after yesterday’s walloping. There were some very active sellers yesterday, but today, they’ve been replaced by bargain hunters.
Opportunistic buying has been fuelled by a number of brokers suggesting certain cyclical sectors have been oversold in recent weeks. Energy is one such example.
The weaker Chinese inflation numbers eased some concerns over further Chinese tightening while the stronger-than-expected Australian job numbers have boosted confidence in our economic recovery.
Tonight’s EU meeting is very important. There’s plenty of anticipation and speculation as to what might come of the meeting. It has the potential to ease or negate concerns over the whole Greek debt situation. It could be a big market mover in both directions.
Any move higher in the euro would indicate an increase in risk appetite, which would be positive for equity markets, especially Australia.
Market Update from the Trading Room – 1.15pm
Australia 200 CFD Index: 4555.5 (0.9%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Energy | 1.9% | Telecommunications | -3.4% | |
| Financials | 1.3% | IT | 0.1% | |
| Materials | 1.1% | Healthcare | 0.1% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| ANZ | 6.4 | Telstra | -5.7 | |
| Westpac Banking Corporation | 6.3 | AMP | -1.1 | |
| BHP Billiton | 5.9 | Suncorp Metway | -0.6 |
Economics – Job creation surged beyond all expectations in January, with the economy adding 52,700 jobs compared to an expected rise of only 15,000. Full-time employment gained 15,900 jobs, while the unemployment rate fell to 5.3%, from 5.5% in December. It had been expected to rise to 5.6%. This stronger-than-expected result will pressure the RBA to resume interest rate hikes in March. In a note, ANZ said futures expectations are now predicting a rate hike for March as roughly a 50-50 proposition, up from a 25% earlier this morning. The broker believes the strength of employment growth shows this economy has a ton of momentum behind it.
BHP Billiton – Following its strong result yesterday, a number of brokers have upped their targets and ratings. In a note from JPMorgan, the miner’s price target was raised to $42.62 from $40.15. The broker said the stronger-than-expected result was largely driven by reductions in costs and that most of this came from a decline in raw materials and consumables (specifically fuel and energy) as prices fell. JPMorgan expect a proportion of these 'cost reductions' to be reversed in following periods on the back of stronger commodity prices, including energy prices. Deutsche Bank reported it was a strong result despite being below its forecast of US$6.3 billion. The broker said it was an excellent result with iron ore, coking coal, energy coal and diamonds surprising all vs. consensus. Deutsche believes BHP is in an exciting phase with about US$50 billion of capex allocated to growth projects between FY10 and FY15.
BHP Billiton & Iron Ore – In a report from Goldman Sachs JBWere, it believes comments on the spot iron ore price being 90% higher than the 12 month contract price indicate BHP Billiton is seeking a big increase in benchmark prices this year. Goldman Sachs was left in no doubt that BHP would be looking for a 90% iron ore price rise for a 12 month contract.
Telstra – There is very little to like about Telstra’s first-half result. Not only has it missed expectations on net profit and dividend projections, the outlook is uninspiring. The company has flagged a low-single-digit drop in 2010’s revenue; a more severe decline than anticipated in its fixed line business; a slowing Australian broadband market; and no near term resolution to its NBN discussions with the Government. Credit Suisse noted Telstra's 1H numbers were disappointing. It went on to say that Telstra faces the combined forces of rapidly declining PSTN revenue, price competition in mobile, loss of market share in broadband and mobile, and a switch to prepaid wireless broadband. Credit Suisse also noted that the fixed broadband market is maturing, and Sensis is under intense pressure.
Commonwealth Bank of Australia – In a note from Citigroup, the bank’s rating was downgraded to ‘hold’ from ‘buy’ after yesterday’s first-half result. Citi said while the result was strong and demonstrated good momentum, much of this is now priced in. If CBA had not announced its January 15 earnings upgrade, the result would have been lauded as heralding the end of the economic downturn for the Australian banks.
James Hardie Industries – The building products supplier this morning upgraded its full-year guidance after beating analysts' expectations for the third-quarter. Excluding asbestos liabilities, the company reported a profit of US$29.8 million, ahead of an anticipated US$24.8 million from analysts. The group said it should report full-year earnings, excluding asbestos costs, at the high-end of analysts' forecasts of US$111 - US$135 million. Previously, it said full-year earnings would be at the high-end of a range of US$77 - US$115 million. Investors should like the upgrade, but the group is hardly out of the woods yet. Management warned the US housing market still faces several challenges, a troublesome sign given the group derived 77% of net sales from the US in fiscal 2009. CEO Louis Gries also said its risk margins will be under greater pressure given pulp and freight costs are rising ahead of evidence of a sustainable recovery in the US.
Overnight Market Report - 9.00am
Overnight, US markets finished marginally lower as speculation over an assistance package for Greece was offset by rhetoric from Ben Bernanke about plans to raise the discount rate for loans to banks.
The broad-based S&P 500 & Dow Jones Industrial Average were both down 0.2%, while the technology laden NASDAQ was weaker by 0.1%.
The market is still focussed on the situation in Greece. Tomorrow’s EU meeting will give further clarity, hopefully settling remaining nerves. The likely outcome is that Greece will have to come up with further details as to how they plan to overcome this debt burden. According to a German government official, it’s unlikely we’ll see an aid package.
Bernanke’s plans to raise the discount rate at which banks borrow are more positive than negative in our view. It delivers a message of stabilisation. However, the big question is whether or not banks will be able to pass the increase in funding costs on to customers or whether the banks will wear it themselves. Considering they have been borrowing at next to nothing, it wouldn’t be too unreasonable to expect them to absorb the rise.
Locally, we’re calling the Australia 200 CFD Index to open 0.4% higher at 4526.
Financials are likely to front gains today as they were the only sector in the US to finish in the black. The S&P Financials gained 0.8%, despite the comments from Bernanke.
Elsewhere, materials names are likely to be weaker. Base metals were mixed on the London Metals Exchange, while both Rio Tinto and BHP Billiton fell 0.9% in UK trade. In the US, the S&P Materials sector lost 0.7%.
Leads for the energy sector were mixed. Crude Oil futures were up 1.6% since 4.30pm yesterday, while the US Energy sector fell 0.4%.
The big release today will be the unemployment data, which is due at 11.30am. Also, keep your eye out for earnings reports from Telstra, James Hardie and Rio Tinto, which is due after the closing bell.
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