25/02/10 - 15:15
Ben Potter - Research Analyst, IG Markets
Afternoon thoughts from the Trading Room – 3.15pm
In Asia, regional markets are mixed on the back of renewed concerns over Greece and its credit ratings and despite stronger overnight leads from the US. The Kospi and Nikkei 225 are down 0.9% and 0.6% while the Hang Seng is flat and the Shanghai Composite is up 0.9%.
Locally, the Australia 200 CFD Index is weaker 0.4% at 4628, near the lows of the session and well off morning highs of 4689.90. The session unfolded in line with overnight leads but sentiment quickly reversed with investors offloading stock into strength. Again, most of the selling is aimed at cyclical names with the industrial, materials and energy sectors detracting the bulk of the points.
From what we can see, there’s no obvious reason for the market’s turnaround. Sometimes, investors have to understand that there doesn’t always have to be a reason behind the selling. The market can just sell-off because it wants to. It can fall under its own weight when the bids dry up.
However, there have been some rumblings about Greek credit ratings and possible downgrades forthcoming. We find this amusing and bewildering; surely it was blatantly obvious that Greece was going to be the subject of more credit downgrades and face the prospect of refinancing its debt at exorbitant levels.
How this is a surprise staggers us! Surely markets have priced this in after three weeks of headline attention.
Market Update from the Trading Room – 1.00pm
Australia 200 CFD Index: 4639.40 (-0.2%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Information Technology | 0.4% | Consumer Staples | -0.7% | |
| Telecommunications | 0.4% | Property Trusts | -0.4% | |
| Healthcare | 0.3% | Industrials | -0.2% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| National Australia Bank | 2.6 | ANZ | -4.1 | |
| Telstra | 1.5 | Wesfarmers | -2.3 | |
| Woodside Petroleum | 1.3 | Commonwealth Bank of Australia | -1.9 |
Economy – Australian 4Q09 business investment rose 5.5% vs 3Q, beating market expectations of 2%. The outlook for 2010 – 2011 is also strong, with growth of 15.3% anticipated. The data confirms the robust investment outlook, largely stemming from infrastructure spending and huge projects in the mining and energy sectors. The data will remind the RBA board (which meets on Tuesday) that investments will drive the economy in 2010, possibly requiring further normalisation of interest rates.
Origin Energy - Origin Energy looks to have easily beaten market expectations, both on an underlying NPAT and revenue basis after it announced an underlying profit of $355 million. The dividend of 25c was in line with forecasts, while its reassurance of FY guidance was well received by the market. Whilst today’s result should be positively reflected in the share price, further sustainable gains will be dependent on Origin’s ability to secure further off-take agreement for its LNG project in an increasingly competitive supply environment. In a positive development, Origin, alongside JV partner ConocoPhillips announced a breakthrough in collaboration discussions with rival LNG proponents at Gladstone, Queensland. Origin’s JV said it will sell gas to BG Group's plant. Origin has the most gas reserves out of five competing developments at Gladstone, so it should still have plenty of gas for its own plant. BG is seen by analysts as being at the head of the pack, so today's deal will strengthen its hand towards making a final investment decision by mid-2010.
AMP – The latest piece of speculation in the AMP – AXA – National Australia Bank saga came from a Sydney Morning Herald article this morning. The paper reported that AMP is considering a $4 billion deal which would see ANZ Bank take a 30% stake in the group in exchange for its ING wealth management arm as a fall-back option if its advances to AXA are unsuccessful. The report is likely to be met with some scepticism after an ANZ spokesman appeared to downplay the idea, saying that the group's current priorities are integrating ING and organic growth in wealth management.
Downer EDI - Downer’s result has disappointed traders after it posted a 1H net profit of A$87m, which was in line with market expectations. However, guidance for FY growth of 5% disappointed the market as it was anticipating an upgrade. Downer’s management team has a tendency of being conservative, so the question remains, will traders look past this conservative stance and remain optimistic and upbeat on full year earnings guidance? There has been a huge improvement in their operating environment which should bode well for the company going forward, however we did see top-line disappointments in their engineering, mining and rail divisions. Their works divisions surprised to the upside.
Insurance Australia Group – Despite missing market expectations, its 1H10 result announced this morning confirms an underlying operational improvement and milder-than-usual weather activity. As guided back in early February, it said both profit and margins more than doubled from a year ago, with net profit of $329 million coming in below the consensus of $347.6 million. It said while improvements in Australia and New Zealand were pleasing, its UK operations were still struggling.
Suncorp – Metway – In a broker note from Citigroup, it downgraded Suncorp to ‘hold’ from ‘buy’ after yesterday’s first-half result. The broker suspects Suncorp's 1H10 result was probably conservatively stated. However, it noted the evidence of this was hard to find, with its bank margin significantly lower than forecasted, bank costs up on expectations, and the underlying general insurance margin seemingly lower than anticipated. It is likely to take some time to rebuild investor confidence.
Overnight Market Report - 9.00am
Overnight, US stocks rebounded as Fed chairman Ben Bernanke soothed investors’ fears that interest rates were going to rise anytime soon. Instead, he reiterated the need for rates to remain low to ensure the economic recovery.
The tech heavy NASDAQ index and the broad-based S&P 500 both gained 1% while the Dow Jones Industrial Average rose 0.9%.
The market rallied due to the lack of surprises in Bernanke’s speech. He reiterated for a third time now that rates are staying low for an extended period of time. Perhaps the market will start to believe him now.
The Australian 200 CFD Index is called to open 0.6% higher 4674 this morning after a solid session in the US.
Locally, Australian financials should be well supported today after the financial sector was the standout performer in US trade, rising 1.7%.
Leads for materials are relatively mixed with broadly stronger base metals prices in London, and gains of 0.1% for Rio Tinto and 0.9% for BHP Billiton were offset by a fall of 0.3% for the US materials sector. Gold was down 0.8% since 4.30pm yesterday.
Energy stocks should see some interest after Crude Oil prices added 1.1% since our 4.30pm close yesterday.
On the earnings front, companies to report today include Downer EDI, Macquarie Airports, Lend Lease, Origin Energy and Oz Minerals.
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