IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

FTSE 5683 +17

DAX 6568 +45

CAC 3115 +17

DOW 12945 +18

NAS 2661 +8

S&P 1369 +2

Oil 103.27

Gold 1636

Across Asia, markets are mostly weaker after picking up some soft leads from US and Europe. Sentiment slumped amid heightened European growth fears. Disappointing French and German PMIs and a subdued China PMI number all contributed to global growth fears. Another source of concern is political uncertainty in France and the Netherlands, which has undermined the future of the EU stability. The Asian region has fared better than Europe, as investors realise that the prospects for the region are much brighter than a recession threatened Europe. Slower growth is better than no growth prospects at all.

The Aussie market has been a highlight of Asian trade after reporting CPI data, which had been flagged as the key ingredient for a May rate cut. CPI came in much weaker than expected and basically cleared the path for the RBA to cut rates. This boosted Australian equities, as the market traded in positive territory, extending gains to a high of 4373, currently up 0.2%. Elsewhere in the region, Japan’s Nikkei is 0.9% lower, the Hang Seng is down 0.3% and the Shanghai Composite has declined 1.4%. Following the mild improvement in sentiment through the Asian session, US and European markets are pointing to modest gains at the open.

Europe’s problems seem to be escalating, with growth remaining a worry in the wake of disappointing flash PMIs across the eurozone. One has to wonder how much longer leaders can hold on to the dominant economic policies being pursued across the eurozone, especially with Germany still pushing for primacy in austerity. The Dutch government fell and its Prime Minister has already handed in the cabinet's resignation, all on the back of presidential elections in France, which may have produced a result perceived that could potentially generate uncertainty over the coming months. Otherwise, market focus will remain with the key policy decisions out of the US and Japan this week. New home sales and consumer confidence are the key data announcements on the US economic calendar. On the corporate earnings front, Apple reports after the bell in US trade tomorrow, and the tech giant has a history of significantly exceeding expectations.

With CPI showing that inflation is under control, analysts are now debating on the size of the cut. Due to the out of cycle moves by the local banks, a 25 basis-point cut will hardly do much to change the situation. Should the RBA cut rates by 25 basis points, it will more than likely have to follow it up with another 25 basis point cut in June. Alternatively, it could just issue a 50 basis-point cut and hope the banks pass on a significant percentage of this. After having held steady for most of the morning ahead of the CPI numbers, the Aussie dollar was smashed upon the release of the data. AUD/USD traded as low as 1.02472 following the CPI release. The pair breached an uptrend support line which has been in place since the end of last year, and looks vulnerable to further weakness.

Locally, we received a couple of significant company updates, with Newcrest and Wesfarmers in focus. WES put on 1.7%, while NCM dropped around 4%. NCM has significantly underperformed both the market and the gold price, as production issues have seen confidence destroyed and short sellers have come out to play. Today’s production report was not the first time this happened, with not only Q3 numbers well below expectations, but the 2012 guidance for gold, copper and capex missing the mark. NCM does have good growth projects with long-life assets, but the market does not seem too keen to pay up for this growth. Given the downgrades, it is feasible to think the stock will be in the doghouse in the short-term, but we feel any pullbacks to A$25 could be well supported, and potentially a good buying opportunity. This level represents the pivot high from 2006 and 2007 and on current consensus, EPS assumptions of A$2.37 would put it on a forward multiple of 10.5x. EPS assumptions will clearly be lowered today, but these are still some positives.

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