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Market Commentary | Stock Market News

May 15th, 2010

Author:

11/05/10 – 15:30

Ben Potter, Research Analyst, IG Markets

Afternoon thoughts from the Trading Room – 3.30pm

In Asia, regional markets are all lower this Tuesday as equity-raising concerns among Japanese banks overshadowed the sharply higher offshore leads following the European bailout plans. The Hang Seng is the biggest faller, down 1.3% while the Nikkei, Shanghai Composite and Kospi are all weaker between 0.1% and 0.4%.

In Australia, the ASX 200 is currently underwater to the tune of 0.8% at 4566, seemingly unwilling to follow the hugely positive leads provided from offshore equity markets. Having opened in modestly positive territory, the market rolled over on relatively benign Chinese economic data with the heavily-weighted materials, energy and financial sectors all detractors.

We’re seeing wholesale selling this afternoon as the theme of Australian underperformance continues unabated. Whilst it’s hard to pinpoint the exact reasons behind today’s selling, we rather suspect it’s a combination of continued offshore fund liquidation and the macro issues facing global markets. Also, there’s probably a bit of nervousness ahead of tonight’s Federal budget.

Australia is facing a lot of domestic headwinds including proposed tax reforms, rising interest rates and an increasingly uncertain regulatory environment.

Perhaps the perception of Australia being a stable, sovereign nation to invest is under review by the global investment community. Overseas investors may also be coming to the view that the low hanging fruit has been picked in Australia, and that its time to go underweight Australian equities.

Tonight’s offshore session will be pretty important, with traders watching carefully to see if last night’s gains can be maintained.

Market Update from the Trading Room – 1.00pm Australia 200 CFD Index: 4609.7 (0.2%)

Forex – In a note from the Bank of NZ, it said the EUR/USD remains heavy as sentiment is extremely fragile, with the Eurozone’s structural issues, “including whopping budget deficits” still needing to be addressed. The bank said there is a view that this package is a bit of a band-aid, with the fundamentals for the euro little changed. In a separate note from Westpac, it said one potential weight for AUD/USD forex traders was the lack of a follow-through move in the EUR/USD overnight following the Euro bailout package.

Arrow Energy – Two large parcels of Arrow Energy shares changed hands this morning, accounting for approximately 1.5% of shares on issue. It traded at A$4.88 per share compared to previous trade of $4.81, with both parcels worth $53.7 million. The large investment most likely reflects the perception that Arrow is trading at too big a discount to the implied value of Shell and PetroChina’s $3.44 billion cash offer for Arrow’s Australian assets. The pair are bidding $4.70 a share, leaving shareholders with an interest in Arrow’s offshore Asian coal seam gas acreage. Analysts believe it could be worth anywhere between 15 and 74 cents a share. However, there are some concerns Shell and PetroChina could do what Peabody Energy did with Macarthur Coal, and reduce the size of their bid in light of Australia’s proposed resource super profits tax.

BHP Billiton – In a broker report from Deutsche Bank, it said BHP Billiton should weather the impact of the Australian resource super profits tax (RSPT) at its present valuation and upgraded the stock to a ‘buy’ recommendation. It estimates a 7.7% decline in NPV and sees EPS falling 6.9% from 2013 – 2018. The broker believes there is a 13% upside to our net present value under the RSPT scenario, therefore believing it has been fully priced in.

National Australia Bank – National Australia Bank along with Santander are likely to be shortlisted to bid for 318 RBS branches in the UK. A formal shortlist is due out by the end of the week, according to a person familiar with the situation. The expectation is that a deal will be closed by the end of the year, with bids coming in between GBP1.5 billion and 2 billion. Buying the RBS branches would significantly boost NAB’s share of the UK market and build on its 340 existing branches, through the Yorkshire and Clydesdale banks. However, most analysts don’t expect NAB to get into a serious bidding war for the assets.

Overnight Market Report – 9.30am

Overnight, global markets soared and European bonds surged after the European Union and IMF delivered nearly a $1 trillion rescue plan to stabilise the Eurozone debt situation.

The technology heavy NASDAQ was the top gainer, rising 4.8% while the S&P 500 rose 4.4% and the Dow Jones Industrial Average added 3.9%.

The coordinated plan from the European Union and IMF was exactly what the market was looking for, possibly a few days late. Either way, price action showed that it will go a long way to restoring confidence for the foreseeable future. Having said that, we still need to see the countries affected implementing strong austerity measures to ensure they hold up their end of the bargain.

Locally, the ASX 200 is called to open 1.3% firmer at 4660 thanks to the bullish surge overnight.

We’ll probably see a continuation of yesterday’s rebound this morning. Industrial, financial and consumer discretionary names are likely to be well supported after their corresponding sectors in the US were the strongest performers, all up between 5.7% and 5.2%.

The materials sector had a very strong night in the US, rising 4.8%. On the London Metals Exchange, base metals were all firmer, with Nickel the best, rebounding 7.6%. While Rio and BHP surged 7.7% and 6.3% respectively in London trade. Having said that, leads for the Australian session are weaker for unknown reasons, with BHP’s ADR pointing towards a 0.1% fall at the open.

At midday, we’ve got a swath of economic data out of China, which could take on added significance given the issues in Europe. It’s been a beacon of global growth and the centrepiece of the world-wide recovery. However, if recent measures to cool their economy produce weaker-than-expected numbers, this could serve to spook the market and weigh on morning gains.

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