23/02/10 - 15:30
Ben Potter - Research Analyst, IG Markets
Afternoon thoughts from the Trading Room – 3.30pm
Across Asia, regional markets are all lower this Tuesday as a lacklustre set of US leads failed to inspire traders and commodities took a breather after recent gains. The Shanghai Composite is the worst performer, down 1.8% while the Nikkei, Hang Seng and Kospi are all lower by between 0.8% and 0.3%.
Locally, the Australia 200 CFD Index is 0.3% weaker at 4702 with the bulls and bears engaged in an arm wrestle around the 4700 level. Despite the market being down, you can hardly say it’s defensively postured with healthcare, telecommunications and consumer staples among the worst performing sectors. Rather than there being any central theme, stocks are being driven by company specific news.
Banks appear to supporting the market, again outperforming. There appears to be a growing acknowledgment that banks are leveraged to a rebound in earnings as bad-debt charges diminish.
Whilst sentiment has improved recently, it still remains fragile with participants needing constant reassurance.
Case in point – despite Bernanke and the Fed being blatantly clear that the hike in the discount rate did not signal an imminent change in its monetary policy stance, the market appears to be waiting to hear this for a third time when Bernanke speaks later this week.
Perhaps then the penny will drop and the market will take him at his word.
Market Update from the Trading Room – 1.00pm
Australia 200 CFD Index: 4698.7 (-0.4%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Property Trusts | 0.7% | Healthcare | -0.9% | |
| Financials | 0.1% | Information Technology | -0.8% | |
| Industrials | -0.2% | Materials | -0.8% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| Macquarie Group | 0.9 | BHP Billiton | -5.4 | |
| ANZ | 0.7 | AMP | -2.0 | |
| Amcor | 0.6 | Wesfarmers | -1.2 |
Interest rates – In an economic note, Macquarie Group said there are signs that suggest the RBA is setting itself to hike again in March or April, probably March. It continued by saying the economy is going well and the RBA has been clearly hawkish, plus excess capacity and downside risks to growth are limited. It believes the RBA has "all the time in the world" to hike or pause as it sees fit, but by pausing in February, the bank has taught the market a lesson in assuming policy had become too predictable.
Amcor – Its first-half profit of $172.5 million before items beat the $160 million median estimate of 5 analysts. The results sent its stock up more than 2% this morning. However, it will pay 12.5 cents interim dividend vs 17 cents a year ago. CEO Ken MacKenzie said the acquisition of the Alcan packaging business gives Amcor confidence it will continue to improve its operational performance and reduce costs. Commenting on its Rigid Plastics division, the company said given improvements in Latin America but continued uncertainty in the North American market, it is unlikely earnings in the second half will be significantly different to the second half of last year.
Aristocrat Leisure - The gaming company may have flagged its annual net loss ahead of time but that doesn't necessarily mean investors can rest easy with its earnings report. The group lost $157.8 million in the period, largely due to a $187.3 million provision for its US convertible bonds litigation and other abnormal items. However, revenue still fell 16% to $908.6 million from a year ago, it didn't pay a dividend and management said a slight pick-up in the replacement cycle will be "more than offset by lower expansions". The group said revenue in North America fell 14% in the period, while Japan fell 50.5% and Australia rose 12%.
APN News & Media – Its shares are down more than 2% despite posting a FY net profit of $92.6 million, in line with previous company guidance. CEO Brendan Hopkins said he is happy to see the back of 2009 and that things are looking more positive heading into the current year. He is upbeat about today's launch of its new "measurement of outdoor visibility and exposure" system for outdoor publishing. In other markets, similar systems have always been coupled with a significant uptick in people using outdoor advertising, so it is expecting similar pickup here over the next 3-to-5 years.
Oil Search – The oil & gas company posted a FY profit of US$133.7 million, ahead of market expectations but underlying earnings missed forecasts. Underlying earnings (which strip out one-offs) was US$99.6 million, compared to a market consensus of US$111.4 million. However, most investors were focused on the group's involvement in its PNG LNG liquefied natural gas project in Papua New Guinea. Oil Search had nothing substantial to report, other than reiterating financial close and final off take deal with Taiwan's CPC Corporation was on track for completion by March 31.
Rio Tinto – In a note from Morgan Stanley, the miners profit forecasts was boosted after lifting expectations on earnings for the group’s aluminium division, Rio Tinto Alcan. It upped Rio's EPS forecast for 2010 by 4.5% and 2011 by 1.8% after a detailed review of the aluminium division. The broker said it thinks margins will improve in the current year, driven by higher prices, and the benefits of cost-reduction programs. It also believes the company has an opportunity to increase sale prices of third-party bauxite and that alumina demand appears to be tightening. Aluminium smelter performance was also much improved in 2H09 and margins should be higher in 2010.
Seven Network – In a comment from Citigroup, Seven Network’s ‘hold’ rating was reiterated after the group yesterday unveiled plans to merge with Australian Capital Equities (ACE) or Kerry Stokes' WesTrac unit, which will materially change the key drivers and risk profile of the stock. The broker said it struggles to understand the strategic merits of combining a resources-driven sales/repair company with media investments, other than ACE gaining access to Seven's cash. Citigroup said while Seven has signalled an intention to re-list Seven Media Group and Coates Hire, it expects the stock to continue to trade at a discount with the large shareholding (68%), reducing liquidity, and interest in the stock.
Overnight Market Report - 9.00am
Overnight, US stocks ended a volatile session lower, thanks to a late selloff as investors digested the latest round of earnings news, President Obama’s healthcare proposal, and Schlumberger’s $11 billion planned takeover of oil services rival Smith International.
The Dow Jones Industrial Average was the biggest decliner, down 0.2% while both the NASDAQ and broad-based S&P 500 slipped 0.1%.
Markets kicked off in a fairly quiet manner after very strong gains last week. While it looks like the correction may have played out, we believe the market will continue to trade sideways rather than burst through recent highs.
The Australia 200 CFD Index is called to open modestly lower at 4714, down 0.1%.
The S&P Energy sector was the biggest decliner on Wall St, closing the session weaker by 1.4% after Crude Oil prices gave up 0.5% since our 4.30pm close yesterday. Given this, we’ll likely see weakness among energy names.
Some selling pressure may be seen among the miners after the S&P Materials sector was dragged down by 0.4%. Base metals were broadly lower in London Metals Exchange trade, while BHP Billiton fell 1.2% and Rio Tinto added 0.4% overnight. Spot gold also slipped, losing 1% at US$1114 per ounce.
Financials should outperform today, offering some support to the market after the S&P Financial sector was the biggest gainer, up 1.3%.
Elsewhere, company reports due for release today include Amcor, APN, Sonic Healthcare & Oil Search.
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