02/03/10 - 15:30
Ben Potter - Research Analyst, IG Markets
Afternoon thoughts from the Trading Room – 3.30pm
In Asia, regional markets are mixed after solid US leads and better-than-expected US consumer spending data. The Korean Kospi is the best performer, up 1.1% while the Nikkei is flat. The Hang Seng and Shanghai Composite are weaker by 0.7% and 0.2% respectively.
Locally, the Australia 200 CFD Index is trading just above the flat line at 4689 having reached earlier highs of 4716. Despite stronger-than-expected retail sales data, the broader market drifted off morning highs as the rate decision approached.
As was widely tipped, the RBA chose to hike rates by 25 basis points to 4%, resulting in a relatively muted reaction from the market. Equities gave up 6 or 7 points while the Aussie dollar is virtually unchanged, having spiked to a high of 0.9033 immediately after the announcement.
As expected, the consumer discretionary sector is coming under pressure on concerns spending habits will be reigned in, while financials (which stand to benefit) are holding their ground.
Whilst the timing of the hike was always subject to conjecture, the RBA explicitly said rates were going higher as the economic recovery continued.
Ultimately, the decision to hike should be seen as a vote of confidence in the underlying strength of the Australian economy. The board noted that growth is close to trend and inflation is tracking near target, so it makes complete sense to move rates up to more neutral levels.
Market Update from the Trading Room – 1.30pm
Australia 200 CFD Index: 4701.2 (0.3%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Property Trusts | 1.1% | Telecommunications | -0.9% | |
| Information Technology | 0.8% | Utilities | -0.3% | |
| Materials | 0.7% | Consumer Discretionary | -0.2% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| BHP Billiton | 2.9 | National Australia Bank | -4.4 | |
| Rio Tinto | 2.3 | Telstra | -1.2 | |
| Commonwealth Bank of Australia | 2.3 | Origin Energy | -0.6 |
Economic - Australian retail sales were strong in January, rising a seasonally-adjusted 1.2% over month versus an expected increase of only 0.5%. It signalled a healthy rebound from the soft December sales period. The result has strengthened the case for the RBA to raise interest rates at 2.30pm this afternoon as it previously highlighted its concerns about the strength of consumer demand in the wake of 3 rate hikes in late 2009. Meanwhile, building approvals were down 7.0% in January versus expectations for a 0.9% rise, which may reflect the removal of economic stimulus to the housing sector in 4Q.
Base metals – In a commodities paper from Deutsche Bank, it believes copper prices are likely to be supported this week by supply disruptions following the powerful earthquake in Chile. Chile is the world's largest copper producer, accounting for 33% of global mine production. Deutsche said Anglo-American's Los Bronces and El Soldado mines halted operations. They are closest to the epicentre of the quake . Rio Tinto said its Escondido copper mine is not affected. Deutsche also thinks copper prices will be supported by a likely drop at Shanghai Futures Exchanges’ warehouses. Also, in a report from Jefferies, it believes a rise in iron ore prices to 18-month highs last week (as Chinese purchasers returned to the market following their New Year holiday) looks positive for the dry bulk shipping sector. Jeffries notes that bulk shipping charter rates (especially capesize rates) are likely to improve in the coming weeks, with demand for ore "clearly strengthening", and inventories at Chinese ports below normal.
Rio Tinto – Overnight, at an industry conference Rio’s CEO Tom Albanese delivered some relatively downbeat comments regarding the global economy. Albanese said he’s “somewhat concerned” that the global economy could dip back into recession, dampening demand for commodities in the next 18-24 months. He believes near-term risks include sovereign risk issues in Greece and Spain, a likely slowdown in stimulus spending in China, and possible limits on stimulus spending in the US. The comments are likely to serve as a reminder that the demand outlook remains somewhat clouded in the near term. Still, longer term, Albanese was confident demand from the likes of China and India would underpin rising demand for the group's key commodities, including iron ore, coal and copper.
Virgin Blue – Australia’s second major airline this morning appointed former Qantas executive general manager John Borghetti to replace founding CEO Brett Godfrey from May 8. After 36 years with Qantas, Borghetti left shortly after losing out to Jetstar’s head Alan Joyce for the CEO role when Geoff Dixon departed in November 2008. As head of Qantas’ mainline operations, Borghetti oversaw the introduction of premium economy class and the fit out of A380 aircraft. He was also responsible for both domestic and international operations. Borghetti’s experience should be good for Virgin’s struggling long-haul carrier, V Australia. It should also bode well for Virgin’s efforts to poach more of the corporate travel market from Qantas, and probably a greater share of Australian government’s business travel (which is currently under tender).
AUD – Forex traders have pushed the Aussie lower since this morning’s highs of 0.9016, despite the stronger-than-expected retail sales data and ahead of this afternoon’s interest rate decision from the RBA. Forex traders have it currently trading at around the .8990 level. In a note from RBC Capital Markets, it believes upbeat comments yesterday by RBA’s Governor Stevens have strengthened expectations for a hike.
Overnight Market Report - 9.00am
Leads for today’s trade are positive and should see the Australian extend yesterday’s 45 point gain. Whilst there are some downside risks for the session, the open looks positive with IG Markets calling the Australian 200 CFD Index to start higher by 0.7% at 4712.
Last night’s leads were positive with both the FTSE and S&P closing up 1% a piece. However, a lot of the news that drove overnight markets was priced into ours yesterday, hence the reduced impact. The news that Prudential is looking to acquire AIG’s Asian arm for around $35b was negative for Sterling. It was ultimately bullish for equities however, especially when Sovereign wealth funds are expected to back the deal, giving it their stamp of approval. Markets are also partially factoring in a potential bailout of Greece, although there’s yet to be any concrete news and it was not reflected by forex traders overnight as the Euro fell against the greenback.
In terms of sectors, materials were the clear standout overnight, both in the UK and US. Whilst a lot of the moves in commodities took place during yesterday’s session, we are expecting some good buying in this space today. The BHP ADR is pointing to an open of $41.67 (up 1.7%), which in theory should translate into 10 index points.
Locally, 13 companies are trading ex- dividend today and we have adjusted our opening call accordingly. It will be interesting to see if these stocks can recoup their dividend in the day’s trade.
It will be busy on the economics front, with retail sales and building approvals due at 11.30am and the key RBA interest rate decision at 2.30pm.
Currently, the market is pricing in a 56% chance of a 25bp hike, with the bulk of economists supporting this view. Should rates remain unchanged, we would likely see forex traders push the Australian dollar lower, possibly towards the mid-89c level.
Part of the reason the RBA remained on hold last month was due to the potential deterioration in the sovereign debt issues in Europe. Today’s decision will be seen as a litmus test on whether sovereign debt risks to the global economy are viewed as material. A hike would suggest the RBA believes these risks aren’t likely to de-rail strong growth among Australia’s trading partners. However, on the flip side, rates on hold would suggest the RBA is worried about potential contagion of the debt issues. This would likely be viewed negatively by both domestic and offshore traders.
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