15/02/10 - 15:30
Ben Potter - Research Analyst, IG Markets
Afternoon thoughts from the Trading Room – 3.30pm
In Asia, equity markets have all started the week lower as debt worries in Greece and Dubai curbed investors’ appetite for risk. The Nikkei 225 and Kospi are both 0.3% softer, while the Hang Seng is down 0.1%.
Locally, the Australia 200 CFD Index is 0.4% weaker at 4543, off the morning high of 4568.7. Defensive names are dominating trade with gains seen across the healthcare, telecommunications and consumer staple sectors.
Overall, trading is subdued after a benign session on Wall St and ahead of tonight’s Presidents Day holiday in the US. Also, traders appear to be waiting for further rhetoric regarding the European debt situation from tonight’s EU meeting. The global reaction to these developments will be key in determining risk appetite for the remainder of the week.
On a short-term basis, the market is delicately balanced. The local reporting season has been pretty solid to date and kicks into high gear in the coming fortnight.
The question that still remains is whether the continuance of strong company and economic news will be enough to buffet the market from the numerous global macro issues that are still casting a shadow over investor confidence?
The fact that the likes of BHP Billiton and Rio Tinto are unable to find any meaningful support, following their better-than-expected results suggests these macro issues are still dominating investor psyche.
Market Update from the Trading Room – 1.00pm
Australia 200 CFD Index: 4549.5 (-0.3%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Telecommunications | 0.9% | Materials | -1.0% | |
| Healthcare | 0.9% | Property Trusts | -0.9% | |
| Consumer Staples | 0.4% | Energy | -0.6% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| CSL | 1.8 | BHP Billiton | -4.5 | |
| Westpac Banking Corporation | 1.5 | Commonwealth Bank of Australia | -3.4 | |
| Telstra | 1.4 | Rio Tinto | -2.1 |
Earnings season – Brokers are positive on the earnings season so far, with Citigroup saying in a note that good surprises are outnumbering disappointments by four to one, leading the broker to boost its expectations. It said over the course of the past week, EPS growth expectations for the market overall have firmed further to 8.4%, from 7.9% last week and 5.1% pre-reporting season. Citi went on to say, that resources have been the driver of this, but industrials have also contributed. Elsewhere, in a separate report from Deutsche Bank, earnings for the December half were about 8% above analysts' expectations in aggregate for the companies that have reported and that full-year 2010 earnings have been increased by 2%. DB believes management teams continue to be fairly cautious, but that they sound more confident than in recent times. The broker said it’s early days in reporting, but the tone so far is reasonably good, and the earnings are measuring up to expectations. If that continues to be the case as the year unfolds, and earnings growth continues to evolve as anticipated, the Australian market still has the capacity to rise solidly this year.
Commodity markets – In a research note from Citigroup, the broker believes commodity markets are falling into the worry well, with market participants concerned about China's growth stumbling, and excess inventory causing imports to collapse. Combined with concerns about OECD demand recovery, these issues are pointing to subdued markets in 1H 2010. However, Citi said it continues to look for a second-half recovery, with the US dollar movement likely to play an increased role in commodity prices. The broker expects an increasingly close (inverse) relationship between the US dollar and commodity prices, as investors and speculators previously bought commodities as a US dollar hedge. USD strength, if not driven by clear signs of a US economic recovery was always going to be bad news for commodity markets. Citigroup believes this is an important contributor to the current price weakness.
Crane Group – Crane Group lost more than 7% this morning, after downgrading its outlook. First-half net profit fell 47% and the company now expects a 35% decline in FY10, down from a 30% fall tipped at October's AGM. While restructure and cost cutting programs have helped mitigate the impact on earnings of a 20% drop in revenues, Crane warns that top-line growth is now critical to improve profitability. However, it is cautious on the visibility for demand recovery, particularly in New Zealand and across civil and infrastructure projects.
Bendigo & Adelaide Bank – Its shares are up more than 4% this morning after the group’s first-half result and dividend beat many market forecasts. Net profit more than doubled on year to $104.1 million, with cash profits climbing 24% on year to $139.7 million. In a broker note from Credit Suisse, going forward the bank expects to deliver 'strong' 2H10 results, supported mainly by a stable net interest margin and sound credit conditions. Elsewhere, Citigroup commented that the group's steady dividend, which defied market expectations for a lower payout, sends a positive message from the board.
Bluescope Steel – Australia’s biggest steel producer slumped to a 5-month low this morning after reporting a $28 million 1H loss versus the $14 million expected. The company anticipates a small FY profit due to increasing domestic and export demand conditions, improved steel prices, and cost cuts. However, the market seems sceptical on the group’s 2011 growth prospects. In a note from an institutional trader, market consensus for 2011 EPS is said to be 27 cents, up from 9 cents in 2010. How will Bluescope grow EPS that much in 2011 when iron ore and coking coal contract price settlements are likely to rise by 50% or more? The trader also noted there was no pricing power in BlueScope’s core business and that utilisation rates were low at 83% vs analyst forecasts of 95%.
Leighton Holdings – In a note from UBS, Leighton Holdings was cut to ‘sell’ from ‘neutral’ after the group’s earnings upgrade was soft and flat work-in-hand figures failed to inspire much confidence. UBS said it continues to see positive momentum as margins recover and clients proceed with work, particularly contract mining. However, as usual the valuation remains tight.
Overnight Market Report - 9.00am
On Wall St on Friday, the major indices were mixed after China took further steps to slow its lending which reignited its concerns over the pace of economic recovery. Chinese policy makers raised reserve requirements for banks by 0.5%, effective from the 25th February.
The Nasdaq was the best performer, up 0.3% while the S&P 500 and Dow Jones Industrial Average lost 0.3% and 0.4% respectively.
Locally, SPI futures are calling the ASX 200 to open 6 points lower at 4556 as many of the US sectors finished moderately softer.
It looks like we’ll see a bit of weakness among material stocks at the open after the S&P Materials sector in the US lost 0.2%. In London, base metals were mostly lower and Rio Tinto and BHP Billiton finished the session down 2.1% and 1.3%. Gold miners should be relatively well supported after gold prices rose 0.3%.
The energy sector might see some minor selling after Crude Oil futures fell 0.9% since 4.30pm on Friday. However, the S&P Energy sector managed to finish flat.
Elsewhere, financials will likely see some selling after the S&P Financial sector lost 0.3% and the KBW Banking sector 0.8%.
The S&P Industrials sector was the worst performing US sector, down 0.8%. This may weigh on local industrials.
In economic action, keep an eye out for Preliminary Japanese GDP at 10.50am while BlueScope Steel, Healthscope, WA News and Bendigo & Adelaide Bank are all expected to report results.
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