Summary: Wall Street went further into record territory as sharemarket bulls remain unconcerned about continued mixed signs in the global economy and used the continued settling down of tensions in the Ukraine as a rational to go on a buying spree. With 50 minutes left in the US session, the MSCI World Index is higher (+0.4%) with gains in Asia (+0.6%), Europe (+0.5%) and the US (+0.3%). In other financial markets, 10-year government bond yields were universally higher as investors increased their exposure to risky assets which sparked capital losses for government bond investors (US Treasuries up to 2.72%, UK gilts higher at 2.76% and Japanese bonds closed at 0.61%), high beta currencies were up strongly on the back of strong domestic economic data and fading risks of ECB rate cuts (AUD +1.3% to 91.00 and the Euro +0.9% to 138.95), and commodities were mixed: gold +0.7% to USD1,350 per troy ounce. Dr copper +0.3% at USC321.40 per pound. base metals were mostly higher. Iron ore -0.1% to USD115.52 per metric tonne in US futures markets. oil -1.1% to USD100.29 per barrel. The SPI suggests that the Australian market will open +14 points higher (+0.3%) at 10am AEST. Market news Asia – Asian markets ignored the negative lead from Wall Street yesterday morning and experienced a renewed burst of optimism as investors increasingly believed that things had settled down in the Ukraine, especially with the IMF structuring a bailout program to prevent a collapse of the country’s banking system. There was not much economic data to throw sentiment off its bullish course and a deprecation of the Yen helped prices of Japanese exporters and regional bourses followed suit. By the closing bell in India, the MSCI Asia Index was higher (+0.6%) with regional gains led by Japan (+1.3%), India (+1.1%), Taiwan (+0.9%), Hong Kong (+0.6%), Singapore (+0.4%), China (+0.3%) and Korea (+0.2%). In the domestic sharemarket, the S&P/ASX 300 Index closed -0.1 point lower (steady at 5,398) with six sectors rising led by IT (+1.4%) and industrials (+0.7%), whereas telcos (-0.8%) and healthcare (-1.1%) were the only notable declines. Europe – Europe followed the positive Asian lead, but ended the session well off their respective daily highs. There was a lot of second and third tier economic data which was mostly supportive for risk markets and the ECB left interest rates unchanged, which was broadly expected. By the closing bell, the EuroStoxx Index was higher (+0.5%) with gains in the major markets recorded in France (+0.6%) and the UK (+0.2%), whereas Germany (-0.01%) wasn’t so fortunate. In the periphery markets performance was more upbeat with strong gains in Spain (+0.9%), Portugal (+0.9%) and Ireland (+0.7%), whereas Italy (+0.4%) was also up, but Greece (-0.04%) defied the regional trend and closed marginally lower. US – on Wall Street, US stocks have followed the positive leads from Asia and Europe. There was no consistent lead from US economic data which came out mixed, as investors await tonight’s non-farm payrolls. With 30 minutes left in the US session, the Dow Jones Industrial Average is up +81 points (+0.5% to 16,441) with the S&P 500 (+0.3% to 1,879) and the NASDAQ (-0.1% to 4,355) underperforming even though seven sector are currently up led by financials (+0.7%) industrials (+0.4%) and materials (+0.3%), whereas healthcare (-0.5%) and utilities (-0.8%) are stuck in negative territory. Economic news Australia/Asia – The broad driver of growth in Wednesday’s national accounts, namely exports, recorded a another sharp jump in January (+3.7% m/m, after +4.4% m/m in December), which took the annual rate up to +20.1% y/y with the trade balance posting its largest surplus (AUD1,433 million) since August 2011. The result was way ahead of consensus (+AUD100 million) and was primarily driven by resource exports (and an early Chinese New Year, which may have pulled forward some demand) as well as a temporary rise in gold (+44% m/m) and rural (4.9% m/m). Given the decline in iron ore prices in recent months, one can’t help but wonder how long the surpluses can last. Meanwhile, retail sales soared in January (+1.2% m/m) at a rate more than double consensus (+0.5% m/m), which took the annual result up to a fresh five-year high of +6.2%. Clearly, the January 2014 school kids bonus which provided AUD400 – AUD800 per child temporarily supported household spending. Nevertheless, given the weak wages growth, declining confidence, high household debt and rising unemployment, this is a very impressive result and a clear sign that RBA rate cuts have gained traction. Europe – no major economic releases, but the ECB completed its board meeting and left official interest rates unchanged at +0.25% with President Draghi stating that the recovery remained in line with previous assessment with +1.2% growth expected this year. Meanwhile, German factory orders came out for January at +1.2% m/m, which was above consensus (+0.7%) and the upwardly revised December result (-0.2%). US – no major releases, but initial jobless claims for this week came in below expectations at +323k (street estimates were for +336k) and US factory orders came in at -0.7% for January which was less than street estimates (-0.5%) but better than the December result (-2.0%). Major company news Europe A busy day of corporate earnings results made for a volatile day on the LSE with insurer Aviva leading the risers (+8.1%) after its full-year result showed a considerably faster progress on its restructuring, which buoyed sentiment. Meanwhile, British Telecom Group edged up (+0.3%) with prices now up over +10% over the past three months as rumours continue to circulate than Vodafone (+0.4%) will make a bid for the group, although those close to the proposed acquirer saying it is a false rumour. Elsewhere, engineering group IMI (-4.3%) led the decliners on the exchange as the company’s earnings came in line with expectation, but margins were lower and the company warned that currency effects would be a headwind for 2014. US US stocks were slightly higher with Yum Brands (+3.3%) benefiting from a broker upgrade to ‘outperform’ in response to improving prospects for growing China sales. The company has recorded five consecutive quarters of same-store sales declines, but its strong positioning and margin initiatives should establish a better environment for 2014. In contrast, shares in retailer Costco (-3.0%) weighed on market indices after the retailer stated that profits declined -15% to USD463 million even though sales rose +6% to USD26.3 billion, which was a touch below street estimates. Similarly, shares in Massachusetts-based office supply company Staples plunged (-14.6%) after the company announced it would close hundreds of stores to trim USD500 million of costs as the it struggles to cope with the changing market place and the increasing challenge from on-line competitors like Amazon (+0.01%). Major data releases Australia/Asia Economics – no major domestic releases, but there is the February Chinese trade balance (Jan: exports +10.6%y/y, imports +10.0% y/y and balance USD31.9 billion). Equities – BHP launches its Five Rivers Conservation Project and Chevron Australia managing director Roy Krzywosinski speaks at a function in Perth. Europe/US Europe – no major releases. US – February US non-farm payrolls (unemployment rate: 6.6%; payrolls: +115k), January US trade balance (Dec: -USD38.7 billion) and February US average weekly earnings (Jan: +0.1%). What is the key investment message overnight? The Australian economy is clearly in the process of transitioning its growth engine from the mining sector to the non-mining part of the economy and this is likely to continue supporting prices in the cyclical parts of the domestic market, as prior rate cuts from the RBA continue to work their ways through the economy and provide more thrust to earnings growth. This trend is likely to place simple yield plays under increased scrutiny this year and investors need to continue to search for undervalued surplus cashflow generating business models, which have strong balance sheets. These stocks give investors upside potential with downside protection.
Posted on: Fri, 07 Mar 2014 00:12:38 +0000
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