12/02/10 - 15:30
Ben Potter - Research Analyst, IG Markets
Afternoon thoughts from the Trading Room – 3.30pm
Across Asia, equity markets are mixed after commodity prices pushed higher overnight and fewer American claimed for jobless benefits. The Nikkei and Shanghai Composite are the best performers, up 0.7% and 0.6%, while the Hang Seng is only 0.2% firmer. The Kospi is bucking the trend, currently weaker by 0.9%.
Locally, the Australia 200 CFD Index is flat at 4555.5, well off morning highs of 4593.3. It’s a real tug-of-war today with material and energy strength offset by selling among financial names.
Falls amongst the big four are offsetting strength in iron ore giants, Rio Tinto and Fortescue Metals Group.
The market is still very nervous and lacking confidence, despite the positive developments overnight in the Euro zone and yesterdays’ weaker-than-expected Chinese inflation numbers.
The ‘sell in to strength’ mentality is still firmly entrenched. It looks like this is going to be the first weekly gain in four weeks, so you can easily see why traders are eager to snatch profits from the table.
It seems participants are beginning, albeit slowly, to realise the results from corporate Australia and the economic data being released are very strong, especially on a relative basis.
However, this is yet to be reflected in stock prices. Yes, we’re seeing solid advances here and there, but overall, the market as a whole is yet to gain any real traction.
Market Update from the Trading Room – 1.00pm
Australia 200 CFD Index: 4552.7 (0.0%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Consumer Staples | 1.4% | Telecommunications | -2.0% | |
| Materials | 0.9% | Utilities | -1.1% | |
| Energy | 0.4% | Financials | -0.9% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| BHP Billiton | 4.6 | ANZ | -3.4 | |
| Rio Tinto | 3.7 | Telstra | -3.4 | |
| Wesfarmers | 3.3 | Westpac Banking Corporation | -2.9 |
AUD/USD – in a strategy note from TD Securities, they said it looks increasingly difficult for the AUD/USD to reach parity, although it should push higher from current levels to trade around the 0.9500 level by mid-year. The broker said the revision is not due to faulty fundamentals, as they remain bullish on the Australian economy. They believe however, that economic outperformance and monetary policy tightening are already 'priced in' and known entities for the AUD, hence the currency has to work a lot harder to materially rally from here.
Leighton Holdings - Leighton's 1H net profit more than doubled to $288.9 million from $111.2 million a year earlier, beating analysts' expectations for earnings of $279.2 million, according to a Dow Jones poll of seven analysts. The company slightly changed the language for FY earnings outlook, saying net profit should be "in excess of" $600 million - rather than "around" $600 million”, which it said late last year. It still forecast $19 billion of sales. Work in hand is only modestly up to $38.4 by the end of December, from $38.2 billion at the end of September. The group said it will have $40 billion of work in hand by June 30.
Newcrest Mining – Newcrest’s first half 2010 net profit was up 14.4% on year to $176.2 million, and declared a maiden interim dividend in a sign of its confidence in the outlook for the gold market. Newcrest's rival, Lihir, has just reinstated dividend payments, so Newcrest's move to pay an interim dividend may be a response to that. Underlying profit was up 10.3% on year to $266.6 million, possibly a touch below market expectations, with many analysts looking for between $270 million and $281 million. Newcrest said it is in a strong position with low gearing, a number of growth projects nearing completion and the Cadia East project on track for board approval in early April. In a note from Credit Suisse, they said 1H10 profit was solid and in line with their forecast. The broker believes the payment of Newcrest’s first interim dividend is a sign of confidence in earnings, generating capability of the company and its net cash position.
Rio Tinto – The miner’s FY09 profit was about 5% above analyst forecasts, giving it a slightly more positive outlook commentary than rival BHP Billiton. Headline net profit was up 33% to US$4.87 billion from US$3.7 billion in 2008, when an aluminium write-down impacted the result. A more meaningful measure is underlying earnings, which fell 39% to US$6.3 billion, but came in above consensus of US$6.0 billion. Rio said its aluminium division, which has been the biggest drag on earnings, returned to profitability in 2H09. The miner also said the factors that drove the commodity price recovery in 2009 will continue through 2010, with China to grow at more than 9% and an OECD recovery to provide further support. The better-than-expected profit and outlook statements look positive.
In a note from UBS, they said the dividend was in line with expectations, cash flow was stronger than forecast leading to lower gearing and a lower net debt position than anticipated. The broker went on to say that Rio beat its own guidance for reducing controllable costs and got its gearing to a level where it can boost capital spending if warranted.
Telstra – In a report from Royal Bank of Scotland, analysts noted that while the structural headwinds evident in yesterday's 1H result "don't help the investment case", they are more than reflected in the group's share price. The broker believes an agreement on national broadband network is the only thing that will get the stock re-rated. Royal Bank of Scotland said visibility on timing is very limited, but it is in all parties' best interests to get a deal done, especially in an election year. They cut the stocks target price $4.25 from $4.30, but reiterated its ‘buy’ rating on the view the stock "remains cheap".
Overnight Market Report - 9.00am
On Wall St overnight, stocks and metals rose as investors speculated a European agreement to help Greece will ease the sovereign debt concerns in the Euro zone. Also helping was a lower-than-expected inflation report out of China and news that fewer Americans filed for unemployment claims in January.
The tech-heavy NASDAQ was the best performing index, up 1.4%, while the Dow Jones Industrial Average rose 1.1% and the S&P 500 gained 1%.
It’s going to be very interesting to see how markets react over the next 24 hours. Potentially, we’ve seen some of the risk removed from China following the weaker inflation numbers, as well as a significant easing from Europe’s concerns. We’ll be looking for signs of an improvement in investor sentiment and confidence in the short-term.
Locally, SPI futures are calling the Australia 200 CFD Index to open 1% higher at 4597, with all sectors in the US posting gains.
The S&P Materials and Energy sectors were the biggest gainers in US trade, both up 1.7%. On the back of this, our material stocks are likely to see strong buying support as base metals on the London Metals Exchange were all firmer, up between 0.5% and 3%. Both Rio Tinto and BHP Billiton added more than 2% in London trade.
Energy stocks should be well bid too after Crude Oil futures rose 0.4% since 4.30pm yesterday.
Elsewhere, we should see some good buying in the industrials space as the S&P Industrials sector gained 1.5% overnight. Financials should be relatively supported, although the S&P Financials sector was the worst relative performer, only up 0.2%.
In corporate news today, keep an eye out for results from Newcrest Mining and Leighton Holdings.
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