01/03/10 - 15:30
Ben Potter - Research Analyst, IG Markets
Afternoon thoughts from the Trading Room – 3.30pm
Across Asia, regional markets are all higher in early afternoon trade, after copper jumped the most in 11 months on concerns the Chilean earthquake may disrupt supplies. The Hang Seng is the best performer, up 1.8%, while the Shanghai Composite, Nikkei and Kospi are stronger by 0.9%, 0.7% and 0.4% respectively.
Locally, the Australia 200 CFD Index is 0.8% firmer at 4674.1, only a few points off session highs of 4679.2. The magnitude and breadth of today’s gains is somewhat surprising given the uninspiring US leads and growing rhetoric about the stagnating US recovery.
We were expecting a more cautious day’s trade, especially given the uncertainty over tomorrow’s RBA interest rate decision, and a jam packed week of local economic data (which includes retail sales, construction spending and GDP). If this wasn’t enough, Friday night will see the latest read on the US employment situation with the release of the February non-farm payrolls.
Whilst gains are broad based, it’s worth noting the defensive bias, with consumer staples, utilities and healthcare adding significant points.
Specifically, Woolworths and Wesfarmers are enjoying strong follow-through buying after they both delivered better-than-expected results.
Market Update from the Trading Room – 1.15pm
Australia 200 CFD Index: 4669.9 (0.7%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Consumer Staples | 1.9% | Telecommunications | -0.5% | |
| Industrials | 1.6% | Property Trusts | 0.2% | |
| Healthcare | 1.5% | Materials | 0.3% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| Westpac Banking Corporation | 4.3 | BHP Billiton | -4.4 | |
| ANZ | 3.8 | Suncorp-Metway | -1.2 | |
| Woolworths | 2.6 | AXA | -0.6 |
Copper – Following the massive earthquake in Chile, copper is tipped to open sharply higher today. Major concerns have arisen that damage to infrastructure including electricity, roads and ports will dramatically slow copper exports. At this early stage, damage to mines seems to be limited, with no damage to operations in the north of the country, including BHP Billiton Escondida copper mine. After initially shutting its El Teniente and Andina mines, Codelco has said this morning that both have been reopened. In a note from a UBS analyst, it said power and fuel disruptions could take a week or so to address. Copper is likely to go for a run today, but the reality is, there's a huge quantity of the commodity stockpiled on the London Metals Exchange.
Economics – The Australian TD-Securities-Melbourne Institute Monthly Inflation Gauge rose by 0.1% in February from January. In the year to February, the inflation gauge rose by 1.9%. In a report from TD Securities, it said while runaway inflation pressures do not appear entrenched, pressure is building. It adds that the RBA still looks somewhat optimistic in expecting a gentle deceleration to the mid-point of the 2 to 3% target with minimal interest rate adjustment. As the unemployment rate continues to shrink and spare capacity is all but absorbed, TD Securities believe the RBA Board can tomorrow comfortably recommend another 25 basis point rate rise to 4.0 per cent.
Rate expectations – As tomorrow’s interest rate decision from the RBA approaches, the market is becoming increasingly hawkish and expecting a rate rise. As recently as last Monday, expectations were at about 20%, but have since climbed to above 50% in the past week. In a comment from ANZ, it said the market is shifting to expecting a rise as there's been a bit of press over the weekend supporting one. But it's still finely balanced and not a sure thing. Elsewhere, in a strategy note from National Australia Bank, it believes tomorrow’s RBA decision will be seen as a litmus test on whether sovereign debt risks to the global economy are viewed as material. It continued saying, a hike would suggest the RBA believes these risks aren’t likely to de-rail strong growth among Australia’s trading partners. On the flip side, no rate rise would suggest the RBA is starting to worry more about downside risks to its forecasts for global growth.
Woolworths – In a note from Merrill Lynch, it upgraded Woolworths to ‘neutral’ from ‘underperform’. This was following the pullback in capital expenditure and reinstatement of a capital management program, after the retailer announced it would give up to $400 million back to investors. Merrill said it had been a concern for some time that Woolworths' capex was not meeting an adequate return, so it was pleased that the company has pulled back on capex and will return capital to shareholders. The broker expressed concerns that the cost of doing business is increasing, and that there’s more competition in the Australian food and liquor industry. However, in general, it was very pleased by Woolworths' actions in the first half of 2010 in cutting capex and working gross margins higher.
Overnight Market Report - 9.15am
The Australia 200 CFD Index is called to open 3 points lower at 4635 after an uninspiring trading session on Friday night.
Despite a strong set of base metal leads from the London Metals Exchange, and gains of 3.5% and 2.4% for Rio Tinto and BHP Billiton in London, the US S&P materials sector could only manage a flat close. So given this, we’ll likely see some weakness from material stocks this morning, especially given BHP Billiton’s ADR is pointing toward a 0.6% lower open.
Elsewhere, we should see some support among energy names as the S&P Oil and Gas sector rose 0.2%.
Financials should also be well bid after the S&P Financial sector was the best performer, up 0.6%.
In economic releases today, RBA Governor Stevens is speaking at 9.45am, while Australia’s current account deficit is due at 11.30am.
Week in review - ASX 200
After two weeks of gains and stabilisation in sentiment, the Australian market closed the week 2.6 points higher at 4637.7, amid signs erratic behaviour was beginning to return globally. For the month of February, the ASX 200 index rose 1.5%, an impressive performance following January's 6.2% slide.
If we look at the weekly chart, the short-term uptrend is still intact, as the market made a higher high and higher low. Last week's price action printed what's known as a 'spinning top' candlestick formation, which indicates indecision in the market as both higher and lower prices were rejected. Interestingly, the rejection of higher prices came at the 50% Fibonacci retracement level at 4709, a level of significant selling pressure. A move this week through last week's low of 4589.9 would be confirmation of bearish momentum, with targets towards support at 4500.
At the moment, we're seeing a tug-of-war between economic data, political concerns, and company fundamentals. Markets seem very indecisive and appear to be focussing on issues that would have been completely ignored last year.
A classic example is the re-emergence of worries over Greece last week. Thursday's big sell-off came on the back of rumblings about Greek's credit ratings and the possibility of forthcoming downgrades. 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.
Looking ahead, markets will continue to grapple with these political concerns without the distraction and support of corporate earnings. It's a big week in economic news, both locally and in the US, so sentiment and direction of trade will be crucial in determining where the ASX 200 is headed over the coming month.
Week in review - S&P 500
The US snapped a two-week winning street last week as political concerns combined with weaker economic data to push equity markets lower. The broad-based S&P 500 index closed the week marginally weaker, losing 0.4% to 1104.49. For February, the S&P 500 easily outperformed the ASX 200, logging a gain of 2.9%.
From a technical perspective, the weekly S&P 500 chart is still in a short-term uptrend, as last week's price action printed a lower high and a higher low, commonly referred to as an 'inside bar'. This indicates some indecision among bulls and bears. As with the ASX 200, the 50% Fibonacci retracement level is acting as strong resistance through the 1110 level. However, the large lower shadow tells us that softer prices were rejected by good buying pressure.
Despite one of the strongest quarterly earnings season in years, nobody was impressed. Overall, earnings have beaten Wall St estimates by 7%, with the biggest sector, Information Technology (19%) the leader. Its earnings beat estimates by 25%. Yet, political concerns and worries over weaker-than-expected economic data have caused nervousness, justified or not.
A classic example of an unjustified reaction, in our opinion was last week's kneejerk reaction to US consumer confidence figures. It's amazing how a survey of just 3000 households can impact on global markets! Whilst it was the lowest reading in 10 months, the figures were in stark contrast to what corporate America has been delivering in its current profit season. Recent company results have provided actual evidence of what the consumer is doing, and it's a lot more positive, and reliable than the above survey. Yet, markets chose to hang their hats on this data and completely ignore the reporting season.
Looking ahead, uncertain trading conditions are likely to persist as investors face a week of heavy data. Today's ISM manufacturing survey will kick things off, while the week will end with Friday's crucial non-farm payrolls number. The employment picture will certainly be the main event as job losses continue to sideline investors and pose questions over the sustainability of the recovery. Currently, expectations are for losses of approximately 80,000 in February, although severe winter weather conditions could easily blur the numbers.
A weaker number would confirm the strong unemployment claims data seen recently while a better-than-expected reading could see investors put some of their concerns to bed. Either way, it's certain to be another volatile and choppy week.
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