11/03/10 - 15:30
Ben Potter, Research Analyst, IG Markets
Afternoon thoughts from the Trading Room – 3.30pm
Across Asia, regional markets are mixed as they digest a slew of economic data out of China and Japan. Latest figures suggested the Japanese economy grew at an annual pace of 3.8%, well below last month’s 4.6% preliminary number. China released a typically robust set of monthly economic numbers that suggested it may have to take further measures to cool its economy. The Nikkei 225 is the region’s outperformer, higher by 0.9%. The Shanghai Composite and the Hang Seng are lower by 0.4%, while the Kospi is weaker by 0.3%
Locally, in the Australian market, stocks are struggling to find direction again. The ASX 200 is currently flat having earlier reached an intra-day high of 4840. Earlier gains were erased when monthly employment data suggested only 400 jobs were created in February, well below consensus expectations for 15k jobs. While the unemployment rate held steady at 5.3% the lack of jobs creation clearly disappointed, particularly after ANZ job advertisements (released earlier in the week) rose by more than 19% in March from the previous month.
While the market is trading flat, it is certainly defensively postured, with the telecoms, healthcare and consumer staples sectors among the best percentage gainers. Heavyweight sectors which have driven our recent surge (including the financials, materials and energy sectors) are again flat to slightly weaker. Given the gains some of these growth sectors have seen in recent weeks we definitely feel it is a positive that they are treading water rather than seeing any major retracement.
Having surged by just under 5% over the last 8 trading sessions, and within striking distance of its post-GFC highs (4955), the market seems to be lacking the domestic catalysts to take it higher.
With the results of the recent reporting season now firmly baked into prices, it looks as though it’s going to take some sort of global/offshore event to break us out of our apparent malaise and make a serious assault on the 5000 level. While we’re only 170 odd points short, it feels a long way away, with a lot of hard yards in between, probably much like a marathon runner covering those last few kilometres.
Market Update from the Trading Room – 12.15pm
Australia 200 CFD Index: 4816 (-0.1%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Telecommunications | 2.1% | Information Technology | -2.4% | |
| Healthcare | 0.4% | Industrials | -0.5% | |
| Consumer Staples | 0.2% | Financials | -0.4% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| Telstra | 3.4 | Westpac Banking Corporation | -4.6 | |
| CSL | 1.0 | BHP Billiton | -1.8 | |
| ANZ | 0.9 | QBE Insurance Group | -1.2 |
Economic news – Australia’s employment data showed the creation of 400 jobs versus forecasts of 15,000. The unemployment rate was unchanged at 5.3%, which was anticipated. As we said this morning, this has seen forex traders sell the Aussie dollar as strong data expectations were priced into the market. Just prior to the release, it was trading around the 0.9145 level before falling to a low of 0.9115. It’s currently hovering around the 0.9120 mark.
Strategy – In a note from Goldman Sachs JBWere, it believe it is time to buy Australian exposed stocks, arguing that the Government will shortly be forced to upgrade their economic growth forecasts to realistic outcomes. GSJBW recently upgraded its expectations for Australia’s GDP to 3.75% from 3.5% for 2010 vs the 2.6% for the US and 1.2% for Europe. The broker also anticipates an Australian jobless rate of 4.9% by end 2010 and 4.75% by end 2011. It said many offshore investors will have to face the fact that Australia is a very good place to invest this year. Goldman’s sees upside risk to bank earnings estimates (particularly in FY11) due to improved lending growth, and potential for below consensus through-cycle bad debt charges as large unutilised provisions are potentially released.
Myer – Myer’s 1H10 net profit rose 38% to $115 million from a year ago, excluding IPO costs, which was slightly ahead of analysts’ forecasts for earnings of $111.3 million. EBIT margin improvement, up 90 bps, pleased analysts who were expecting around 70 bps of growth. However, the dividend of 10.5 Australian cents was at the low end of guidance. Looking ahead, the group reiterated full-year EBIT and dividend forecasts first laid out in its prospectus. Management said sales growth is tracking above 2% in the first-six weeks of the second half. However, it believes the total half is likely to be flat (up to 2%), indicating caution about the rest of the half, which is smart considering it’s cycling last year's government stimulus.
Chinese CPI – In a comment from the National Australia Bank’s forex desk, it said if Chinese CPI data today shows a strong acceleration, sentiment on China's recovery will turn negative, hurting the AUD. It also notes, rumours of a sharp rise in Chinese CPI inflation in February could provide a trigger for an interest rate hike, which could reverse the recent improvement in sentiment towards global growth prospects. This is another hurdle to get over before investors will be keen to push AUD/USD significantly higher.
Overnight Market Report - 9.00am
On Wall St overnight, stocks finished off their highs as a decline in oil prices overshadowed an upbeat report on wholesale inventories and an improvement in the corporate bond market.
Once again, the Nasdaq was the best performer, rising 0.8% while the broad-based S&P 500 rose 0.5% and the Dow Jones Industrial Average was flat.
Looking forward, participants still aren’t clear on where the market is headed. The market has rallied strongly from the recent lows but seems to be tiring. People can’t see where the next upside catalyst might come from. Whilst the recovery is heading in the right direction, there are still some concerns as to its sustainability and whether it can stand on its own two feet when stimulus is withdrawn.
Locally, the Australia 200 CFD Index is called to open 0.3% higher at 4833 after a solid set of leads from the US.
Australian financials should see some buying interest today after the S&P Financials sector led the US market firmer by 1.1%.
Elsewhere, energy stocks will be well supported after Crude Oil futures rose more than 1.2% since 4.30pm yesterday. The US Energy sector was the second best performer as better-than-expected US supplies data pushed futures higher.
There are a lot of economic releases due out today, both locally and from China. Firstly, at 11.30am, we will get the latest read on the Australian employment situation. Expectations are for 15,000 jobs to be created and the unemployment rate to remain steady at 5.3%. However, there may some upside bias to this given the 19.1% increase in ANZ jobs ads on Tuesday and also the recent trend of stronger-than-expected figures.
Given these expectations, the long Australian dollar trade is one of the most crowded trades as a lot of upside potential is already priced in. Given this, we see increased risks to the downside rather than the upside.
Secondly, there is a lot of big news coming out of China with it set to release Industrial Production, CPI, Fixed Asset Investment, PPI, and Retail Sales at 1pm. CPI and Industrial production will receive the most attention, with hotter-than-expected numbers likely to bring about further cooling measures from the Chinese government.
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