29/06/10 - 15:30
Ben Potter, Research Analyst, IG Markets
Afternoon thoughts from the Trading Room – 3.30pm
Across Asia, regional markets have fallen to a two-week low on the back of growth concerns out of China. The Chinese Conference Board said its leading index posted its smallest rise since November, raising fresh concerns over the outlook for China’s economy. Unsurprisingly, the Shanghai Composite is the biggest faller, down 1.8% while the Nikkei 225, Kospi and Hang Seng are all weaker between 1% and 1.3%.
In Australia, the ASX 200 is currently 0.4% softer at 4366 having spent much of the day oscillating around the flat line. There has been no rhyme or reason to today’s trade with sectors up convincingly one minute and down the next. We see this as further evidence of a market that has lost its way and is searching for direction. As things currently stand, the materials, energy and industrial sectors are all modestly lower while the financial sector is trading flat.
We’re seeing a real sense of uncertainty about the market at the moment, a real lack of conviction. When we have that, there’s a natural tendency for the market to drift lower, which is what we’re seeing.
There’s concerns coming from different angles – RSPT, Chinese growth, Europe sovereign debt and the upcoming US earnings season to just name a few. Markets hate uncertainty.
With the US reporting season kicking off in a few weeks, this could be the catalyst the market has been looking for, particularly if earnings can meet or exceed expectations. The impact could be even more pronounced given the sell off we’ve had ahead of the upcoming earnings season. This contrasts from recent quarters where stocks have rallied ahead of these periods.
Market Update from the Trading Room – 12.45pm
Australia 200 CFD Index: 4387.9 (0.1%)
| Top 3 Sectors | Bottom 3 Sectors | Property Trusts | 0.5% | Industrials | -0.5% |
|---|---|---|---|---|
| Healthcare | 0.4% | Utilities | -0.5% | |
| Financials | 0.3% | Energy | -0.1% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| Westpac Banking Corporation | 3.1 | Newcrest Mining | -1.5 | |
| Rio Tinto | 2.1 | ANZ | -1.4 | |
| BHP Billiton | 1.9 | Woolworths | -1.2 |
Tattersalls - Tatts Group is cutting the carrying value of its Talarius unit and the software used in its Maxgaming business in NSW by $140 million and $25 million respectively. However, the group maintained it will declare a final dividend that won't be less than last year's 21 cents a share. The group said while it's experienced a decline in consumer spending in the UK, the longer-term value of Talarius is "promising" and operating profits there are expected to double in FY11 and rise "substantially" in FY12. Tatts is paying a GBP10 million restructuring charge for the business during this and next FY. It said the Maxgaming charge is the result of an early replacement of the IT applications.
Atlas Iron – According to reports from China, Hebei Iron & Steel Group, China's largest steel maker by output, is in talks with Atlas Iron over a stake in the Ridley magnetite project in Western Australia. Hebei Iron, which doesn't have any overseas mining resources, is looking at the Ridley project to bolster its iron ore supplies. The project is expected to yield 15 million tons of ore annually over the next 35 years. Atlas, which is merging with Aurox Resources, another Australian ore miner, has been seeking a development partner for the Ridley project.
Downer EDI - Downer EDI is down more than 5% after it moved to scotch media reports in the Sydney Morning Herald, citing a leaked email, that claim Downers Works Australia division is deferring $35 million in creditor payments until post FY10. However, Downer said the $35 million is actually owed to it by debtors, most of which is expected in before June 30. On top of this, after taking a $190 million provision on its key Waratah train construction contract earlier this month, a report from Goldman Sachs JBWere flagged risks that another similar sized provision could be required in the next year or two. While Downer recently moved to appoint 2 new directors, the market continues to be concerned about its credibility and ability to profitably deliver on key contracts, with a history of write downs and cost blowouts rearing its head again.
Rio Tinto – In a comment from RBS, it continues to believe that Rio Tinto shareholders will not vote for the group's planned iron ore joint venture with BHP Billiton following a briefing with Rio CEO Tom Albanese. RBS said the iron ore JV synergies were acknowledged but no comments on a potential change in structure of the equalisation payment were provided. The broker continues to believe that Rio shareholders will not vote for the JV under the current payment terms. RBS also reckons that Albanese's "tone was more cautious than recent outlook statements provided by the company", with key concerns around the property bubble in China and EU debt issues. RBS kept its ‘buy’ rating but trimmed its price target to $80.06 from $80.66.
Energy Resources Australia – In a report from Deutsche Bank, it upgraded ERA to ‘buy’ from ‘hold’, but shaved its target price to $17.30/share from $20.00. The upgrade came following a visit to the group's Ranger uranium mine last week. The broker said that due to permitting time lines, it now expects first production from the heap leach in 1H 2014, and Ranger 3 Deeps in 1H 2015. Deutsche believes the delays are priced in to the stock.
Overnight Market Report - 9.00am
On Wall St overnight, US stocks posted their fifth loss in six sessions as investors worried that the G-20’s pledge to cut deficits rapidly could dent global growth. The broad-based S&P 500 was the worst performer, losing 0.2% while the NASDAQ and Dow Jones Industrial Average were only down 0.1%.
Domestically, the ASX 200 is called to open the session 0.4% weaker at 4369 following the late afternoon selling on US markets.
The energy and basic materials sectors were the biggest detractors in US trade, finishing the session 1.4% and 1.1% lower respectively. Hence, we’re expecting most of the weakness to come from the same sectors locally. Crude oil futures were down 0.8% to $78.10 since 4.30pm yesterday while in the materials space, the leads look slightly more positive.
Base metals were mostly firmer on the London Metals Exchange, while in normal trade, Rio Tinto and BHP Billiton added 2.1% and 0.8% respectively. Nonetheless, we’re still calling the locally traded BHP Billiton to open 0.6% softer at $38.27.
Elsewhere, we’re likely to see moderate weakness from consumer discretionary, financial and industrial names following lower sector leads. On the upside, some support among the defensive consumer staples and utilities stocks may help offset declines.
Once again, there is nothing in the way of economic news locally. It looks like it’s going to be another very mundane day’s trade, unless something of interest occurs in Asia.
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