08/03/10 - 15:30
Ben Potter, Research Analyst, IG Markets
Afternoon thoughts from the Trading Room – 3.30pm
We are seeing some strong signs of confidence filtering through the market; this can be seen not just in the fact that nearly every news story out there seems positive today, but also with some large M&A activity, small caps outperforming, credit spreads globally contracting and simply through the fact the ASX 200 is up 7 days in a row.
Whilst the banks have had a good run they look relatively fair valued for now and we are seeing traders roll into material names providing some leadership in the short term. Price negotiations will certainly favour our minors and will provide a positive backbone to go forward; even though China has its doubters for now this seems to be the place to be.
Whilst we did get a better-than-expected read from the non-farms on Friday, traders are saying we could get a really good set of numbers next month. This optimism has fed nicely through to our shores - mix that with some M&A activity, further gains in resource plays and the market seems poised to make an assault on 5000 on the ASX.
The potential takeover of Arrow was certainly the focal point of the day’s trade and after political rhetoric M&A is the key catalyst for equities this year. The potential takeover by Shell and PetroChina on the face of it is very positive for Arrow’s shareholders, with the average price target amongst analysts at $4.65 on a 12 month basis the fact it is trading on a 9% premium to that is extremely attractive. We have seen some analysts valuing Arrow’s International business around 55c making the full deal worth $5.00, so in theory we should not see too much volatility at these current levels. However, this business is hard to value and with the ACCC ready to protect domestic resource companies from Chinese interests it is still a very open story.
Market Update from the Trading Room – 12.45pm
ASX 200 Index: 4823 (+1.2%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Energy | 4.20% | Information Technology | flat | |
| Materials | 2.20% | Industrials | 0.30% | |
| Telecoms | 1.00% | Consumer Staples | 0.30% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| BHP Billiton | 16.1 | Woolworths | -0.7 | |
| Arrow Energy | 4.1 | Insurance Australia Group | -0.54 | |
| Rio Tinto | 3.2 | Suncorp-Metway | -0.5 |
The Australian sharemarket got off to a flyer today with the ASX 200 index surging through the 4800 point barrier for the first time since 21 January. The market is currently trading firmer by 1.2% at 4823, just off its session high of 4828, with all sectors trading in positive territory.
On Friday we suggested a strong non-farms payroll number out of the US would provide the platform for us to break out of the 4500-4800 trading range we have been in for the last 6 weeks.
With the February non-farms report coming in much better-than-expected with 36k jobs being lost against expectations nearer 70k (there were even whisper numbers of as many as 200k), the market was always going to rally. Add to this another report, which showed growth in consumer credit for the first time in more than a year, and it’s easy to see why the US finished off its week in optimistic fashion.
Locally, our market is being led by the materials, energy and consumer discretionary sectors, with the financial and industrial sectors also contributing some good points - a sure sign the market is starting off the week on the front and in an aggressive frame of mind.
The materials sector is among the best percentage gainers, higher by 2.2%, after strong leads from its offshore counterparts and broadly higher commodity prices. Among the heavyweight names, BHP Billiton and Rio Tinto are higher by 2.5% and 2.3% respectively with the former being boosted by news over the weekend that Japan’s Nippon Steel had agreed to quarterly repricing of coking coal shipments. The April-June price has been set at US$200/t, a 55% increase over the price achieved in the current fiscal year ending 31 March 2009.
A weakening of the USD in the US on Friday and consolidation of the gold price above US$1130oz is also benefiting our major gold miners, with Newcrest mining higher by 1.6% and Lihir Gold firmer by 2.1%.
The energy sector is the other top performer of the morning, currently up by 4.2%. The sector closed 1.8% higher in the US on Friday, courtesy of a 1.6% surge in crude oil prices to US$81.50/barrel. Sector sentiment has been further boosted this morning by news that Royal Dutch Shell and Petro China have made a takeover offer for Arrow Energy at $4.45 per share, plus and an additional share in a yet-to- be-listed company that would comprise Arrow’s international operations. The offer of $4.45 represents a minimum 28% premium to Arrow’s Friday closing price of $3.48. Shares in Arrow have reopened 40%+ higher, currently trading at $5.03.
Among the other major energy names, Woodside Petroleum, Santos, Oil Search and Caltex are higher between 2.2% and 5.7%.
Consumer discretionary names, like their US peers, are benefitting from the surprising growth in US consumer credit with the sector currently firmer by 0.7%. Department Store heavyweights David Jones and Myer are up 1.6% and 1.5% respectively, while discount retailers Harvey Norman and JB Hi-Fi are seeing some selling pressure to be lower by 1.5% and 1.2%.
Turning to our attention to the financials, the sector is stronger by 0.4% with mixed performances across the four major trading banks. Westpac and ANZ are in positive territory by 0.4% and 0.2% while NAB and the CBA are marginally weaker. Amongst the other major names, Macquarie Bank is firmer by 2.9% while Suncorp-Metway is the clear underperformer, currently lower by 1.2%.
All that said, traders should be pleased with today’s price action. We look to have definitively (at least for today) moved through that 4800 point level and are now within sight of our post-GFC highs of 4955 and within striking distance of 5000.
If we can get some positive reads on local consumer confidence/sentiment numbers and unemployment data due out this week, and a solid set of monthly economic data out of China on Thursday, an assault on the 5000 point level could be upon us earlier than we might have anticipated just a fortnight ago.
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