03/03/10 - 15:30
Ben Potter, Research Analyst, IG Markets
Afternoon thoughts from the Trading Room – 3.30pm
In Asia, regional markets are all modestly higher this Wednesday, as concerns over Greece continued to ease and strong moves among resource stocks bolstered gains. The Shanghai Composite is the best performer, adding 0.4%, while the Kospi, Hang Seng and Nikkei 225 are all up between 0.1% and 0.2%.
Locally, the Australia 200 CFD Index is firmer by 0.8% at 4737.50, slightly off earlier highs of 4745.70. The underlying strength is coming from the materials and industrial sectors today on strong volumes, with consumer discretionary names shrugging off yesterday’s interest rate hike.
Upside momentum in base metals markets (instigated by the Chile earthquake) is driving robust gains at the stock specific level, with many of the pure play miners following in the footsteps of the bigger-diversified ones.
For example, a 4% rise in nickel prices overnight has pushed it to 16-month highs, driving strong gains in the likes of Panoramic Resources, Minara Resources, Western Areas and Mincor.
A spike in the gold price above US$1130 per ounce is seeing the likes of Lihir Gold up more than 4%.
This morning’s stronger-than-expected year-on-year GDP read supports the RBA’s rhetoric that growth is returning to trend and in our view justifies yesterday’s hike.
Market Update from the Trading Room – 12.45pm
Australia 200 CFD Index: 4737 (0.8%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Materials | 1.8% | Property Trusts | -0.2% | |
| Industrials | 1.2% | Utilities | -0.2% | |
| Consumer Discretionary | 1.2% | Healthcare | -0.1% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| BHP Billiton | 9.0 | QBE Insurance Group | -3.0 | |
| National Australia Bank | 3.5 | Westfield Group | -0.7 | |
| Wesfarmers | 3.1 | AMP | -0.7 |
Economy - Australia's GDP data affirmed the RBA's aggressive rate hikes in 4Q and points to more down the track. 4Q09 GDP rose 0.9% on-quarter and 2.7% on-year, confirming Australia’s place as one of the strongest growing economies globally. Government spending and strong business investment helped fuel the growth that could now add to calls for a faster withdrawal of economic stimulus. The data supports the RBA's view that the economy is quickly approaching long-term historical average rates of growth, which explains stellar jobs growth over recent months.
Telstra – In a note from Deutsche Bank, it downgraded the telco to ‘hold’ from ‘buy’. It also reduced its price target by 10% to $3.15 after cutting estimates by 2–9% over FY11 – FY13. The broker pointed towards acceleration in consumer take-up of VOIP and declining average revenue per user in the group's fixed broadband division. It now anticipates Telstra’s top line will be flat and EBITDA will decline by 1-3% for FY11-FY13. It added the operating trends will continue to put downward pressure on Telstra’s PE. In a separate broker report, Macquarie Group cut Telstra’s price target to $3.20 from $3.50 after further reducing its earnings forecasts. It does not expect these weakening trends to correct quickly, with evidence of improving subscriber growth dynamics needed as a leading indicator to any revenue growth improvement.
Resources – In a strategy paper from Credit Suisse, it sees value in the Australian resources sector and is currently buying BHP, Rio Tinto, Alumina, Centennial Coal, BlueScope Steel and Fortescue. CS believe that while no one was opening the champagne, the companies are certainly looking for a continuation of a steady recovery in demand, with rising capex and higher dividends evidence that it is not just hollow rhetoric. It noted a clear distinction between bulks and metals, with more optimism on iron ore and coal versus base metals. Still, the broker believes capital management initiatives are unlikely until companies have much clearer path to economic recovery.
Strategy – In a report from Goldman Sachs, it has identified margin upside for a host of large caps, with the preferred being Amcor, Sims Metal, Boral, Bluescope, United Group and Qantas. Goldman said EBITDA margins this reporting season (although recovering from record lows) are still below the levels set in December 2008, during 1990-91 recession, and the long-term average since 1990. The broker’s margin analysis continues to indicate that alpha opportunities remain in cyclicals, with upside risk to earnings as margins revert to, or above, long-term averages. In a separate note from Macquarie Group, it said the recent positive earnings momentum is reflecting a “V” shaped recovery. It continued by saying valuations remain cheap, with the one-month forward price-to-earnings ratio still below 14 times. The broker continues to see more than 15% upside for the market over the next year despite expectations of further significant interest rate rises.
Overnight Market Report - 9.00am
In US trade, most stocks rose for the third-consecutive session. Markets were boosted by gains among raw materials, prospects for higher earnings at banks, more corporate takeovers, and a further thawing of concerns over Greece. However, during the last trading hour, markets pulled back from intraday highs as investors pared bets heading into a data packed three days.
The technology heavy NASDAQ was the best performer, up 0.3% while the broad-based S&P 500 index rose 0.2% and the Dow Jones Industrial Average was flat.
There are some big pieces of data due over the next few days, so traders aren’t taking any big bets either way. We’re likely see a ‘wait and see’ approach from most investors.
The ASX 200 CFD Index is called to open 0.5% higher this morning, with gains likely to come from the energy and material stocks.
The material and energy sectors in the US were the equal best performers, up 0.8%. Base metals were all stronger in London, up between 1.9% and 4.7%, while gold added 1.7% since yesterday’s close. Rio Tinto and BHP Billiton were stronger by 2.4% and 2.2% respectively. BHP Billiton’s ADR is pointing toward a rise of 1.9% at the open.
Energy stocks should be well bid following the overnight lead from the US, despite a flat Crude Oil price since 4.30pm yesterday.
Financial stocks should be reasonably well supported after coveted US financials analyst Richard Bove said bank earnings are set to soar. Bove wrote in a note that “bank earnings in the next few years will soar. Expect gains of 300 percent to 500 percent”.
Elsewhere today, there is limited corporate and economic news with Q4 GDP the only notable release at 11.30am.
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