22/02/10 - 15:30
Ben Potter - Research Analyst, IG Markets
Afternoon thoughts from the Trading Room – 3.30pm
In Asia, regional markets have rebounded strongly following Friday afternoon’s selloff as concerns ease over the surprise Fed discount rate rise. The Nikkei is the best performer, up 2.7% while the Hang Seng and Kospi are higher by 2.4% and 2.1%, respectively. After a week-long break for their New Year celebrations, the Shanghai Composite is 0.1% lower.
Locally, the Australia 200 CFD Index is 1.6% firmer at 4710, just off morning highs of 4714 and holding impressively above the 4700 level. Solid buying among materials, financials and energy names are underpinning gains. We’re continuing to see sentiment improve.
There was clearly some nervousness in Friday’s Asian session ahead of US and European trade. Friday night’s reaction to the discount rate rise was positive, which is now being reflected in strong Asian buying today.
Also, the concerns over the European debt situation are continuing to ease, which is positive for global equity markets.
Technically, the fact that we’re holding above the psychologically important 4700 level is encouraging. Assuming the market can close north of 4700, we would expect it to act as a support level going forward.
Market Update from the Trading Room – 1.15pm
Australia 200 CFD Index: 4712 (+1.7%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Materials | 2.3% | Telecommunications | -4.4% | |
| Financials | 1.8% | Information Technology | 0.6% | |
| Consumer Staples | 1.6% | Property Trusts | 1.0% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| BHP Billiton | 15.7 | Telstra | -6.8 | |
| Commonwealth Bank of Australia | 8.0 | Coca-Cola Amatil | -0.5 | |
| Westpac Banking Corporation | 8.0 | Gunns | -0.5 |
US Dollar – In a briefing note from the Bank of NZ, it believes a firming US dollar will provide headwinds for major currencies this week. It said further evidence of the degree of divergence among the world's major economies will be provided by 4Q GDP estimates for the US, UK and Germany. The bank continued to say there still may be nervousness about the Fed’s decision last week to raise the discount rate. There are plenty of Fed officials due to speak this week, including Chairman Bernanke, who is set to deliver his semi-annual address to the US Senate.
Seven Network – Its shares are slightly weaker this morning as investors digest plans to form a new group by merging the Seven Network with Chairman Kerry Stokes’ WesTrac unit. While many are likely to be scratching their heads at the odd combination, its independent directors believe it is a good deal and recommend investors vote in favour of the scheme. The proposed deal will see Stokes boost his stake in the new group (to be called Seven Group) to 68%, from his current 48% interest in Seven Network.
United Group – The group’s shares are up more than 3% this morning after 1H net profit fell 15% to $55.3 million but beat consensus forecasts of $51.8 million. However, United only reiterated FY10 guidance for underlying net profit of around $150 million, broadly in line with FY09's $150.3 million. While this implies a 60% fall in FY earnings for the second-half, it is consistent with seasonality experienced in FY07 and FY08. Patersons Securities noted there are a few divisional weak spots (most notably in rail), but think the market will look past these and believe in the second-half recovery story. The broker also noted that the US real estate business appeared to perform relatively well in a tough environment, which was a welcome surprise. Paterson’s maintained its ‘hold’ rating and $14.85 price target.
Fairfax Media – Its shares are up more than 1% this morning after the group reported a first-half profit of $148.8 million (from a $365.3 million loss a year ago), easily beating the average forecast of $132.6 million. The dividend of 1.1c was lower than the 2c a year ago and EBITDA was down 11% on year at $323.4 million. Fairfax reaffirmed earlier guidance for earnings growth in the second-half after trade for the first 6 weeks of period was up on year. Argo Investments commented it wasn’t a bad result as it shows very good cost management for the period.
Caltex Australia – Caltex’ first-half profit met market expectations to be up 9% to $203 million (at the top-end of the company’s guidance of $180 - $205 million). Although the profit number was higher, it compares to a year when earnings were battered by extreme currency volatility. Caltex has still been faced with tough market conditions, with lower fuel demand and increased regional refining capacity reducing regional refiner margins. Back in Australia, however, fuel demand is proving resilient with the refiner selling the same volumes of transport fuel in 2009 as 2008. However, the company didn’t provide much outlook, other than to say conditions remain challenging. Investors can at least take heart that it reinstated its dividend, albeit at a relatively modest 25 cents a share.
Australian Worldwide Exploration – Its shares are slightly lower this morning after its 1H profit of $17.3 million missed JP Morgan and Credit Suisse respective forecasts of $36.6 million and $32.7 million. Like its peers, AWE was hit by lower oil & gas prices, as well as contending with a 28% fall in 1H output following natural field declines and unplanned shutdowns (which led to the company downgrading its annual production guidance last month). Looking ahead, the biggest share price catalysts will be the results of its large exploration campaign. So far, results look positive at Trefoil-2 in the Bass Basin. Nearby, Rockhopper-1 well discovered oil and gas, although the size of the discovery wasn’t mentioned.
Fortescue Metals Group – In a broker note from Credit Suisse, it rates the miner as ‘outperform’ for its exposure to a buoyant iron ore market. CS said, while it’s not without risks, and an incredibly difficult set of accounts to decipher, Fortescue is the most leveraged pure iron ore exposure in its ASX mining coverage and offers a conceptual fourfold increase in production on a longer-term view. In a separate report from Goldman Sachs JBWere, it was positive on iron ore stocks, but the lack of clarity in Fortescue's accounts, as well as its debt levels, capex, and expansion plans mean it has a ‘neutral’ rating for the stock.
Overnight Market Report - 9.00am
In the US, stocks ended in positive territory on Friday as investors took the Federal Reserve’s surprise increase to its discount rate as evidence the financial system is on the recovery path and stable enough to deal with such change. However, some participants, still worried that the eventual withdrawal of stimulus from the economy, will hurt Wall St.
The S&P 500 was the best performer, up 0.2%, while both the technology heavy NASDAQ and the Dow Jones Industrial Average rose 0.1%.
The Australia 200 CFD Index is called to open 0.9% firmer at 4675. It would be higher if there were not 9 points in dividends being paid today.
Financial and material stocks should underpin gains for the day. Both the relative S&P 500 sectors were the best performers, up 0.6%. In London, BHP Billiton and Rio Tinto both added 2.3% and 1.1% respectively, while base metals on the London Metals Exchange were very strong. Aluminium, Nickel, Copper and Zinc were all higher by between 2.1% and 4.3%.
Energy stocks should be well supported after the S&P 500 Energy sector rose 0.5% following a 2.4% gain in Crude Oil prices since 4.30pm Friday. Crude Oil is now trading above the US$80 per barrel level.
The reporting season continues today with Seven Network, Fairfax, United Group, Caltex and AWE among the big names to report.
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