Headline developments of the past week

• There was good news out of China with January inflation coming in lower than expected owing to a lower than expected rise in food prices. However, this is unlikely to head of further monetary tightening as non-food inflation actually rose more than expected. Credit data also came in weaker than expected but Chinese import and export data both surprised on the upside but may have been distorted by the Chinese New Year. We remain of the view that China is unlikely to tighten aggressively enough to crunch its economy.
• While higher inflation has already hit emerging market shares, it hasn’t so far been much of an issue for shares in developed countries. Plenty of spare capacity suggests that central banks in the US and Europe have no need to tighten any time soon. However, this won’t necessarily stop investors from worrying about it. In fact, an up tick in inflation rates in the US, Europe and the UK is seeing the debate about when central banks will start to tighten in these countries hot up. As a result, worries about when and by how much interest rates will rise in key advanced countries could become a source of angst for investors.

Major global economic releases and implications

• US economic data continued to add to confidence that the US economic recovery is becoming stronger. Industrial production fell marginally in January but this followed a strong rise in December and manufacturing conditions surveys from the New York and Philadelphia regions point to strong industrial production going forward. While retail sales were subdued on the back of snow storms in January they are up a solid 7.6% from year ago levels. And although homebuilders can see no improvement in demand, at present, housing starts rose in January. On top of this mortgage delinquencies and new foreclosures are now falling and the US leading index rose in January. Meanwhile, in recognition of the improvement in the US economy the US Federal Reserve revised up its growth outlook slightly, but it remains sceptical that unemployment will come down fast enough and it remains relaxed about inflation. However, while the Fed remains relaxed for now a pick up in core inflation in January, albeit only to 1% year on year, is seeing debate about the timing of the Fed’s move towards tightening heat up.
• European GDP growth for the fourth quarter of 2010 was less than expected at 0.3% quarter on quarter or 2% year on year. This may have been due to cold weather. However, strong business confidence readings and rising consumer confidence point to a further acceleration in European growth. UK inflation reached 4% in January, but Bank of England Governor Mervyn King played down talk of an interest rate hike.
• Japanese GDP shrank by 0.3% in the December quarter of 2010, but most leading indicators point to a rebound in growth ahead. The main causes of the contraction were the expiry of government stimulus measures and negative external demand, which is likely now reversing..
• The strength of growth in Asia and the problem of rising inflation were highlighted by news that Singapore grew 12% through last year and that it has revised up its inflation forecast. This points to more monetary tightening which in Singapore’s case means further appreciation in the Singaporean dollar.

Australian economic releases and implications

• Australian economic data was mixed. Housing finance rose in December, adding to the impression that it has stabilised after a sharp fall into early 2010, and the Westpac leading index rose. Against this motor vehicle sales fell in January and skilled vacancies fell in February with the floods likely playing a role in both.
• In Australia, the December half earnings reporting season has been pretty solid so far. Certainly not the big downer many had feared. Of course BHP Billiton shot the lights out with an 88% rise in profits but good results were also seen from Dominos Pizza, Lend Lease, Qantas and Wesfarmers over the last week. So far 49% of companies have come in above expectations compared to a norm over the last seven years of 46% and 73% of companies have reported a rise in profits on a year ago. Interestingly despite the gloom and doom amongst many investors the ratio of positive to negative outlook statements is running at around 4 to 1 compared to 2 to 1 last August. However, we are still only 46% of the way through the reporting season. Two themes are apparent. First, there is a huge divergence between the very strong results seen from resources companies, solid gains from the banks and more mixed and constrained results from the rest of the market. Second, Australian companies are starting to return cash to shareholders via increased dividends or share buybacks. With corporate cash holdings at record levels and gearing low there is plenty of scope for further increases in dividends and more buybacks going forward, both of which are positive for the share market.

Source: AMP Capital Investors

Source: AMP Capital Investors

Major market moves

• Despite increasing worries about inflation and ongoing unrest in various countries in the Middle East, share markets had another solid week on the back of increasing confidence in the global growth outlook. Australian shares were also supported by better than feared profit results.
• Despite stronger growth data and emerging inflation concerns in developed countries bond yields fell, partly on tensions in the Middle East.
• Commodity prices were mixed with oil, gold and food prices up but some metal prices falling. The Australian dollar continued to range around parity against the $US with no clear direction.

What to watch in the week ahead?

• In the US, consumer confidence data (due Tuesday) is likely to show a further improvement, durable goods orders (due Thursday) are likely to rebound after a weak December, existing home sales (Wednesday) and new home sales (Thursday) are likely to fall back a touch in January after strong gains in December and house prices are likely to have recorded a slight fall in December.
• In Australia, data for construction spending (due Wednesday) and business investment (Thursday) will help firm up expectations with respect to how weak December quarter GDP data due March 2nd  will be. A speech by RBA Governor Glenn Stevens will be watched closely for clues regarding the interest rate outlook but it’s unlikely that the message will be any different from that of the last two weeks, ie, that the RBA retains an optimistic medium term outlook but is happy to leave interest rates on hold for now.
• In Australia, it will be the biggest week in the December half reporting season with about 90 major companies due to report including Amcor, Mirvac, Woodside, Oil Search, AGL, Coca Cola, IAG, Origin, GPT and Woolworths. The results are likely to continue to reflect the two speed Australian economy with resources and related stocks doing very well on the back of the surge in commodity prices but non-bank industrials likely to be much more constrained reflecting the soft housing and retail sectors and the strong $A.

Outlook for markets

• After months of strong gains globally, shares are overbought and due for a correction. With investor sentiment towards shares running at high levels a range of factors could provide the trigger including inflation worries, Middle East tensions and the renewed rise in bond yields in debt troubled European countries. However, any pullback in shares should be seen as a buying opportunity as the fundamental backdrop for shares is very positive. Valuations are reasonable, the global economic recovery is looking stronger, the corporate sector is cashed up and starting to buy back shares and boost dividends, and investors are only just starting to switch from bond funds into share funds.
• The broad trend in the $A is likely to remain up as the US dollar and the euro remain under downwards pressure, interest rates in Australia remain relatively high, and high commodity prices keep the terms of trade near early 1950s highs. By year-end, the $A is likely to have reached $US1.10.
• The risk of a sharp back-up in global bond yields this year is very high. Bond yields, particularly in the US are still below longer-term sustainable levels and bond funds are now starting to see outflows.

The post Weekly market & economic update – 18 February 2011 appeared first on AdviserVoice.

With the earnings season now in progress, the past week was full of important corporate announcements that have impacted share performance. This week we discuss the News Corporation earnings report, significant profit downgrades from Myer and AGL Energy, a favourable result from JB Hi-Fi, a new CEO for Asciano and a strong rally for QBE Insurance following news that it will acquire the renewal rights to US insurer Balboa.

News Corporation’s Q2 earnings report was close to expectations and management confirmed that the company is on track to deliver on its full year earnings guidance. In terms of operational highlights, the television segment performed very strongly, underpinned by advertising growth in excess of 20%. Cable network negotiations are also driving strong revenue growth. The weakest segments were publishing and films but this was widely expected.

Myer provided the market with a trading update which revealed a 3.5% fall in sales in the six months ending 29 January 2011. Like-for-like sales declined 5.2% in the same period. This was much weaker than expected and will negatively impact net profit for FY11. Comments from management suggest a competitive retail environment (including consumers purchasing from offshore due to the strong $A), coupled with weaker consumer demand, particularly following the January flooding, were the main reasons for the sales decline. In November 2010, Myer’s guidance suggested growth in net profit after tax (NPAT) in
FY11 of between 5% and 10%. This has now been revised down significantly with Myer forecasting a fall in NPAT of up to 5%.

In stark contrast to Myer, JB Hi-Fi announced a record half year net profit of $87.9 for the six months to end December 2010. Sales rose 8.3% over the period and the company will pay a fully franked interim dividend of 48.0 cents per share. Thirteen new stores were opened in Australia and New Zealand over the period and there are plans to open another 5 in the second half. JB Hi-Fi seems to be addressing the challenge of on-line retailing which is affecting many traditional retail businesses like Myer. The company’s online sales rose 35% over the half year and were up 49% in December. Although sales guidance was
downgraded slightly, the overall result was favourable and defies the weaker trend being experienced by many companies in the retail sector.

AGL Energy announced that recent severe weather events, including the Queensland floods, extreme heat in New South Wales, Victoria and South Australia, and Cyclone Yasi, are expected to reduce forecast underlying NPAT in FY11 by between $30 and $35 million. AGL’s previous forecast for NPAT in FY11 was between $450 million and $480 million. This range has now been revised down to between $415 million and $440 million.

Asciano announced the appointment of John Mullen to succeed Peter Rowsthorn as the company’s new managing director and chief executive officer. Mr Mullen has extensive experience in transport and logistics as he was previously the CEO of DHL Express. He will formally commence as Asciano’s CEO on 14 February 2011.

QBE Insurance performed very strongly on Friday (+7%) following the announcement that it had acquired the renewal rights to US insurer Balboa for a consideration of $700 million. Balboa is currently owned by Bank of America and this attractively structured deal is part of an initial 10-year distribution agreement. Both the purchase price and deal structure are extremely attractive for QBE. Balboa is a very profitable business and it makes good commercial sense for QBE to purchase this US asset at a time when the Australian dollar is trading close to parity with the US dollar. QBE also announced a forecast NPAT for calendar year 2010 that was in line with analysts’ expectations.

Global markets

Major equity markets rallied convincingly as purchasing managers’ surveys from the US, Europe and Asia pointed to accelerating manufacturing and services output. The S&P 500 advanced two per cent to just over 13,000, and the FTSE 100 almost two per cent, closing three points below 6,000. The Nikkei 225 moved up 1.8%, despite corporate releases suggesting Japanese exporters remain hampered by the strength of the yen.

While the equity bull-market that began at the end of August 2010 shows little sign of abating, investors continue to shun ‘core’ bonds forcing yields up, and US ten-year yields hit a nine-month high last week. In the UK, where rising domestic prices are of particular concern, government bond yields rose for a fifth consecutive week, and sterling spiked as high as $1.62, in anticipation of bank base-rate rises in 2011.

The price of copper crossed $10,000 a tonne (or 434 cents a pound), while oil spiked to $103 a barrel midweek on uncertainty over developments in Egypt and the Middle East more generally, before closing a shade below the $100 mark.

Global equities

In a busy week for energy majors, ExxonMobil, the world’s largest company by market capitalisation, registered a near record 53% increase in Q4 net revenue, buoyed by rising oil prices. In the UK, BP announced a full-year loss of $4.9bn – it’s first in nearly twenty years, as the energy giant digested a $41bn charge relating to last year’s Gulf of Mexico disaster – and also the return of dividend payments, which have been suspended for three consecutive quarters. Anglo-Dutch rival Shell shed 3.3% despite reporting a near doubling of 2010 profits to $18.6bn. Elsewhere, GlaxoSmithKline rallied 3.5%, notwithstanding a slump in full-year profits from £8.7bn to £4.5bn, as the UK-based pharma giant announced a £2bn share buy-back programme. US corporate earnings for the final quarter of 2010 have generally surpassed forecasts – and companies as varied as Time Warner, UPS, Dow Chemical, Kellogg and fashion retailer Gap all saw their shares boosted as their revenues exceeded expectations
Over in Asia, Nippon Steel and Sumitomo Metal, two of Japan’s largest steelmakers, unveiled a $24.5bn merger aimed at cutting costs and matching the competitiveness of fast-growing emerging market rivals – while Baidu, China’s largest internetsearch, beat forecasts with a doubling of Q4 net revenue.

Sweden’s government is to sell its 6.3% in Nordea, the Nordic region’s largest bank, in a deal that would raise around $3bn – while LVMH, the world’s largest luxury goods company, reported 2010 sales up 19% to €20.3bn, boosted by rapid growth in Asian markets, and China in particular.

Global bonds

Ben Bernanke on Thursday restated the Federal Reserve’s commitment to a second round of asset purchases, or quantitative easing, which generally supports bond prices. Nonetheless, prices of US government bonds, or Treasuries, slid sharply as the Fed Chairman also voiced concern about the scale of the US budget deficit – which is forecast to hit a mammoth $1,480bn this year, or 10% of GDP. As a result, ten-year yields advanced a chunky 32 basis points to 3.65%.

UK ten-year yields marched up 17 basis points to 3.82% as investors continue to fret about the medium-term outlook for inflation, which could rise to four per cent during 2011. German ten-year yields also increased, although by a less marked 11 basis points to 3.26%, as the European Central Bank considers its response to Eurozone inflation now running at an annualised 2.4% – well above its target of ‘below but close’ to two per cent.

In a relatively quiet week for peripheral bonds, Spain issued €3.5bn of three- and five-year securities in a poorly subscribed auction, raising less than its €4bn target. Nonetheless, benchmark Spanish ten-year yields dropped from 5.51% to 5.16% as Madrid continues to insist the country is not in the same category as other highly indebted Eurozone nations such as Ireland and Portugal.

The post Aviva Investors Market Monitor – 09 February 2011 appeared first on AdviserVoice.