Outlook: Aus shares set for positive start February 01, 2011 09:18 AM
The Australian share market looks set to open higher, following a positive session on Wall St. US stocks lifted as investors reacted to strong earnings from Exxon Mobil and rising commodity prices, while still keeping an eye on the political unrest in Egypt. The price of oil advanced, with Brent oil rising above $US101 a barrel for the first time since 2008.
US economic news: The Commerce Department reported personal income increased 0.4 per cent in December, coming in just under economists’ expectations. While personal spending increased 0.7 per cent in the same month, beating earlier forecasts.
On Monday, the Dow Jones Industrial Average, closed 68 points higher to 11,892, S&P500 firmed 10 points to close 1,286 and the NASDAQ added 13 points to close 2,700.
European stocks were mixed: London’s FTSE down 18 points, Paris up 3 and Frankfurt down 25.
To Asian markets, stocks were also mixed: Hong Kong’s Hang Seng was down 170 points, Tokyo was down 122 points and China’s Shanghai Composite rose 38 points.
The Australian share market finished lower on Monday. The S&P/ASX 200 Index dropped 21 points to close at 4,754 and on the futures market the SPI is up 12 points.
Turning to currencies and the Australian Dollar at 8:45AM was buying 99.73 US cents, 62.27 Pence Sterling, 81.89 Yen and 72.85 Euro cents.
In economic news: The Reserve Bank of Australia today meets for its first board meeting of this year and interest rate decision, with economists widely expecting the rate to be kept unchanged at 4.75 per cent. The RBA is also due to release its index of commodity prices for January. Also due today, the Australian Industry Group/Pricewaterhouse performance of manufacturing index for January, the Australian Bureau of Statistics house price indexes: eight capital cities for the December quarter, and National Australia Bank’s monthly business survey for December.
Company news: On Monday shares in Crane Group Ltd (ASX:CRG) rose 3.97 per cent to close at $9.96. Crane Group has recommended its shareholders accept Fletcher Building Group Ltd’s (ASX:FBU) sweetened takeover bid for the company. The endorsement comes after Fletcher boosted its offer from $9.35 per share to $10.07 per share, valuing Crane at over $800 million. The revised $10.07 bid includes $3.50 in cash, one Fletcher share and a fully franked 50 cent special dividend. For the year ended 30 June 2010, Crane reported a net profit of $31.9 million.
On Monday shares in Westpac Banking Corporation (ASX:WBC) added 0.35 per cent to close at $22.99. The Australian Financial Review says Westpac will this year need to secure around $40 billion in funding. The report comes following Westpac’s CEO Gail Kelly’s comments last week, telling the Senate banking inquiry that she predicts funding costs will peak in around 18 months. According to the AFR, Australia’s big four banks will need to find around $135 billion in wholesale funding this year because of their reliance on international financing. Westpac Banking posted a net profit of $6.4 billion in the year to 30 September 2010.
Ex-dividends: Katana Capital is going ex-dividend today with a $0.01 cent fully franked dividend. Coming up on Friday is Australian Foundation Investment Company with an $0.08 cent fully franked dividend.
To commodities: Gold is down $10.70 to $US1,333 an ounce for the February contract on Comex, silver is up $0.85 to $28.17 for March and copper is up $0.11 to $4.46 a pound. Oil is up $4.32 at $92.19 a barrel for March light crude in New York.
The Australian share market is trading stronger at midday, lead by the miners as stronger base and precious metal prices lifted resource stocks. Gold miners also rallied after gold prices rose in overnight offshore trade, hitting its highest point since mid-November. Copper has also risen to a three-week high.
The S&P/ASX200 index is up 23 points to 4,712, while on the futures market the SPI is up 21 points.
Economics news: The Performance of Construction Index released by Australia Industry Group and the Housing Industry Association shows Australia’s construction sector has contracted for a sixth month in November, with apartment builders reporting the worst conditions in 16 months. The overall construction index fell by 1.8 points in November. Apartment building and house building both took a dive. The survey found firms complaining about difficult market conditions, intense competition and decreasing work from the government’s school building project. Residential builders cited the impact of higher interest rates and weak demand from first home buyers.
Telstra Corporation Ltd’s (ASX:TLS) wholesale division is set to compete with NBN Co and various other wholesalers in the voice and internet services resale market. Telstra Wholesale’s group managing director Paul Geason says the company can keep its wholesale customers after transferring them to fibre if it provides services that NBN can’t such as billing, data hosting, content distribution and television. Shares in Telstra are down 0.36 per cent at $2.79.
Newcrest Mining Ltd (ASX:NCM) says it expects to boost gold output to 3.75 million ounces in the 2014 fiscal year from 2.74 million ounces in 2010. Earlier this year, Newcrest acquired rival Lihir Gold, which mainly operated from Lihir Island in Papua New Guinea. Shares in Newcrest are up 1.22 per cent at $41.59.
Turning to market indices, and the best performing sector is Materials with the index up 127 points to 13,922. Shares in Synergy Metals have advanced 16.67 per cent to $0.007. Shares in Strategic Minerals and Copper Range are also higher. The worst performing sector at midday is Healthcare with the index down 58 points to 8,773. Shares in Cordlife are down 16.9 per cent to $0.295. Shares in Stirling Products and LBT Innovations have also dropped at midday.
To New Zealand: The NZSX50 is down 4 points. Taking a look at the top 4 stocks by turnover, Telecom Corporation of New Zealand is at the top of the list with stock down 1.38 per cent at $2.15; followed by Fletcher Building Group, Sky Network and Contact Energy.
To gold and the dollar: Gold is trading at $US1,421 an ounce and the Aussie dollar is buying 98.84 US cents.
The RBA’s meeting this Tuesday is unlikely to produce another rate hike, we got that when the commercial banks hiked following the November 2 meeting. In terms of market pricing, no economists expect the RBA to hike and futures have no chance of hike priced in and if anything, a very modest chance of a cut – don’t get excited about that though.
There is a lot of talk about the prospect of a more dovish RBA statement following the decision and while that’s always a possibility I’m not sure that the RBA or indeed the RBA board will be feeling that dovish.
You have to acknowledge, and I do, that it has been a good week for the bears (on the economy at least). At face value the retail figures and the soft GDP figures suggest the economy is slowing sharply and certainly some commentators believe just this. Nevertheless, and as I briefly discussed on the day, the headline GDP figure gives a misleading signal as the weakness was driven by base effects, statistical noise and producers underestimating growth (running down inventories).
Consequently I think it’s wrong to conclude from these figures that the economy is slowing sharply. Domestic demand growth (what consumers, business and government actually spend) is still robust, rising 0.6%q/q after 4 quarters of growth averaging 1% and annually, growth is an above trend 4.4%.
I mean it doesn’t make a lot of sense to conclude the Australian economy is slowing. Interest rates are only at average levels. They are not restrictive and I don’t think it’s accurate to suggest that the nation is straining under the weight of restrictive monetary policy. Moreover, jobs growth is very strong and the unemployment rate is very low. Note that we get another update on the labour market this Thursday (1130) and the median market expectation is that 20K (me at 15k) jobs were created. The unemployment rate is forecast to dip to 5.3%.
This, by the by, is one of the reasons I don’t think we can be confident of the signal the monthly retail numbers are giving – you don’t usually have a sluggish retailing sector when jobs growth is so strong. Don’t forget we have been here before, numerous times. Mid-year for instance, things were looking dire in the retail space, along comes an ABS revision and all of a sudden things weren’t so dire.
The opposite occurred this time round. Monthly retail sales were looking solid, along comes one weak month and some revisions, all of a sudden things look soft. My point is, you’re not going to get an accurate picture of the retailing environment when they are subject to such swings (something that it evident in the monthly retail components as well, swings have been huge). Nor are you going to get an accurate picture of the retailing environment from the retailing association. So think big picture, look at the whole canvass and you’ll be able to make a more precise assessment of where the Australian economy sits – and of course profit from any mispricing.
For instance, IBs look expensive for mine. Not even one rate hike is priced into the curve at this point (46% to June) and while I reckon future rate hikes will occur less frequently, I don’t quite think they’ll be that infrequent. I still think there will be 2 rate hikes in the first half, at this stage one each in Q1 and Q2, based largely on global growth prospects – which is why I think 10yrs look expensive as well.
Risk appetite is coming back, the global economy is much, much stronger in the 2H10 than had been projected and there is no sign of this material slowing that has been continually touted. 2011 will no doubt be more of the same – except much stronger. There is an extraordinary amount of policy stimulus globally and that doesn’t look like its going to change any time soon. Indeed the Bernank is apparently about to argue on 60 minutes (11am today Oz time) that he won’t rule out further quantitative easing. US data outside of that is reasonably light and includes initial jobless claims (Thursday), trade data and the Michigan consumer confidence survey (both Friday). The US government then plans to sell $66bn in coupons this week and monetise (this week alone) up to 1/3 of it by buying $15-$22bn worth of treasuries off itself and printing the money to do it.
In Europe , watch out for German factory orders (Tuesday), and then German trade data and industrial production on Wednesday. The UK has industrial production on Tuesday and the BoE meeting Thursday (no changes expected). Otherwise watch out for Chinese trade data on Friday and central bank meeting in Canada , NZ (Thursday morning at 7am) and South Korea (no changes expected).
Don’t forget ICAP’s charity day this Wednesday – dig deep, as all profits earned go toward helping those in need and as we know, good things happen to charitable people. So let’s be charitable!
Hope you have a great week…
There was little data or news out last night. US bond markets were closed for Columbus day, and action was reasonably muted in the FX and equity space. We’re all still waiting for the Fed, the FOMC minutes tomorrow morning and the run of Fed speak - and that’s not to forget the strong dataflow towards week’s end. Remember this dataflow, and ensuing numbers out over the next few weeks are critical. We are at an important juncture and it doesn’t pay to downplay it. Uncertainty is high and there are a variety of views out there. After this run of data we’ll be a in a much better position to assess some of the downside risks being touted – to determine who is likely to be right. We’ll pretty much have Q3 sorted and we’ll even get a glimpse into Q4. We’ll have a better idea as to whether the global economy will indeed deteriorate as many expect, accelerate or just plod along.
For the moment, markets are still expecting the Fed to print more money and that’s the best bet given their rhetoric. Nevertheless, USD did bounce a bit last night as traders took some profit. At the time of writing, Euro was down almost a big figure to 1.3875, Sterling was off 64pips to 1.5875, AUD was broadly unchanged at 0.9849 and Yen rose to 82.18 from 82.03. While we may have seen a bit of a bounce last night, emerging market concerns about USD weakness clearly remain high. Brazil has already taken measures to impose a tax on foreign bond purchases and Thailand announced yesterday that it is considering a similar action. Hot money flows are already a problem for emerging markets – as, by the by, are rising food prices caused by the falling dollar.
The reality is that if the Fed insists on debasing its currency, we’ll be seeing a lot more of this type of action. So perhaps the PBoC’s decision to hike the reserve requirement by 0.5% to 17.5% (1st move since May) was driven, in part, by these hot money flows. Whatever the case, it is intended as a temporary measure (about 2 months) for the 6 largest banks to help rein in excess liquidity. While we’re on China and the ‘currency wars’ etc I heard the Governor of the BoE say the most sensible thing I’ve heard him say in a while. He suggested that China can’t rebalance its economy in a couple of years. As far as I can tell this is the sticking point. China is actually revaluing the Yuan and while I haven’t seen the US publically declare how much of an appreciation they want, I’ve got no doubt, and history suggests, they want it to be radical. The question for the global economy is whether this is a reasonable expectation.
Moving on, and despite USD bouncing, commodities had a mixed session, with crude down 0.8% to $82.00, copper was up smalls and gold was basically unchanged at $1351. Then to equities; they closed basically flat in the US after a decent session in Europe (+0.3 to +0.4%). The S&P500 was down 0.01% (1165), the Dow was up 0.02% (11008), while the Nasdaq finished up 0.02% as well (2402). By sector there was no major departure from zero. Telco’s and energy were up smalls and industrials and basic materials were down smalls. For Oz, the SPI was up 0.01% (4718).
As mentioned US bond markets were closed and there wasn’t a lot of action elsewhere. Aussie futures ended unchanged (3s at 95.09 and 10s at 94.96) on a 3 to 4 tick range.
So that’s about it. No real data to speak of. To the day ahead and at 1130 we get NAB’s September business survey. No one formally forecasts this series, but I would be expecting a bounce in confidence given the pick up in the news flow and share market rally. Tonight, watch out for UK CPI, the FOMC minutes and a speech from the Fed’s resident hawk – Hoenig.