26/02/10 - 15:30
Ben Potter - Research Analyst, IG Markets
Afternoon thoughts from the Trading Room – 3.30pm.
In Asia, regional markets are mostly higher today as a jump in Korean manufacturing confidence boosted optimism that Asia’s growth will continue. The Hang Seng is the best performer, stronger 1.2% while the Nikkei and Kospi are higher by 0.4% and 0.2% respectively. The Shanghai Composite is weaker by 0.2%.
Locally, the Australia 200 CFD Index is 0.7% firmer at 4624, just off session highs of 4626. There had been fears that the market would roll over on the back of Friday afternoon profit taking, as has been the theme recently. However, thus far this isn’t playing out, which is a positive. Perhaps we’re seeing a rebound from an ‘overdone’ fall yesterday.
The material and financial sectors are adding a lot of points while strong gains in Woolworths is driving the consumer staples sector.
ANZ’s Q1 trading update is proving to be another shot in the arm for the financial sector. A significant reduction in bad debt provision is confirming a growing trend across the industry and suggests a strong earnings rebound over the remainder of 2010.
Market Update from the Trading Room – 12.45pm
Australia 200 CFD Index: 4619.9 (0.6%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Utilities | 2.2% | Telecommunictions | -0.8% | |
| Consumer Staples | 1.2% | Information Technology | -0.5% | |
| Materials | 1.0% | Healthcare | -0.5% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| ANZ | 6.9 | QBE Insurance Group | -7.2 | |
| BHP Billiton | 6.6 | Telstra | -1.5 | |
| National Australia Bank | 5.9 | Insurance Australia Group | -0.7 |
Toll Holdings – In a note from Macquarie Group, Toll was upgraded to ‘outperform’ from ‘neutral’, with a price target of $8.67. The broker noted that its 1H underlying net profit of $144 million was well below the anticipated $177 million. Macquarie said it was a disappointing result mainly on account of stronger-than-expected volume declines and weak contributions from acquisitions. The broker expects the timing of the recovery to see strong improvement in FY11 EPS.
Woolworths – Its shares are up more than 3% this morning after the supermarket giant’s 1H net profit came in at $1.1 billion, in line with expectations. Woolworths also reiterated guidance. The group announced a share buyback that could give investors up to $400 million, which is encouraging given it comes at a time when Woolworths is investing in a JV to open a hardware chain to rival Bunnings. Woolies also increased its dividend to 53 cents, up 10.4%. Looking at EBIT, Australian supermarkets’ earnings grew 11.4%, Big W's 6% and consumer electronics 20.4%. New Zealand supermarkets EBIT grew 26.9%.
ANZ – Its shares are more than 3% firmer this morning after its trading update for the first-four months of FY10 looked reasonable. Underlying profit rose by 16% on year to $1.6 billion on the back of 8% income growth. Bad-debt provisions for the period were down 9% on year, with the group saying it's comfortable that improving economic conditions in Australia and New Zealand support the outlook for further falls in bad-debt growth. The fact that ANZ has booked profit growth, as opposed to its rival, National Australia Bank, is impressing the market. Still, the update seems to confirm the growing view that the two Sydney-based banks, Westpac and Commonwealth Bank are pulling ahead of their Melbourne-based peers, ANZ and NAB.
QBE Insurance Group – Its shares are down more than 7% this morning after its FY net profit rose 6% to $1.97 billion, falling slightly short of market expectations around the $2.01 billion mark. Its insurance margin fell to 17% from 19.7%, just managing to scrape in at the bottom end of the guidance range. While premiums are anticipated to grow this year by 3% in AUD terms, after a 10% rise in 2009, the market appears to be disappointed by lower growth rates and the insurance margin outlook of 16 - 18%. In a note from Macquarie Group, it said that the underwriting result quality is strong and should provide confidence in the margin outlook given that global insurance pricing and interest rates are near bottoms. The broker maintained its ‘outperform’ rating and $24.95 price target.
Overnight Market Report - 9.00am
Overnight, US markets fell, although stocks did close well off their lows after investors worried about potential credit downgrades for Greece, and economic reports on jobs and manufacturing orders came in lower-than-expected, disappointing the market.
The Dow Jones Industrial Average fell the most, down 0.5% while the S&P 500 lost 0.2% and the Nasdaq 0.1%.
After some stabilisation in the past two weeks, it appears erratic behaviour is returning to the markets. We’re seeing a tug-of-war between economic data, political concerns, and company fundamentals. There’s plenty of potential catalysts that could send markets lower, but few for the upside.
The Australia 200 CFD Index is called to open 0.1% higher at 4598.
Most of the support today is likely to come from materials after the S&P Basic Materials sector rose 0.4% overnight. This was despite broadly lower leads from London where base metals were mainly softer on the London Metals Exchange, and Rio Tinto and BHP Billiton fell 3.3% and 2.1% respectively. The gold miners should be well bid after gold futures rose 1.3% since our 4.30pm close yesterday.
We might see some weakness among energy names after the S&P Oil & Gas sector lost 0.2% after Crude Oil futures slipped 1.7% in overnight trade.
Industrial and financial stocks are likely to drag on the local market as they were among the worst performers in US trade.
Keep an eye out for ANZ’s trading update, as well as earnings reports from the likes of QBE Insurance Group and Woolworths, just to name a few.
Overall, it looks like it’s going to be tough work for the market to close in the black today. We’ll likely see plenty of profit taking ahead of the weekend, as has been the Friday theme of late.
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