daytrading july 22 afternoon

Afternoon all,

Thanks Endless, Gttrain, Trees, Suzie and to all regulars.

Hope everyone had a great weekend!

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Australian stocks have opened stronger following news China will lift controls on lending interest rates.

The benchmark S&P/ASX200 index was 32 points, or 0.7 per cent, at 5,005 at noon. The broader All Ordinaries index was up 32 points, or 0.6 per cent, at 4,990.

The ASX200 index is back above 5000 points as the market rebounds from Friday’s losses.

Asia’s biggest bond fund halved its Australian holdings this year as a slowing economy makes the nation’s assets less attractive than North America and Europe.

Kokusai Asset Management cut Aussie investments to 10 per cent from as much as 20 per cent late last year and holds 30 per cent of assets in US, Canadian and Mexican debt, Masataka Horii, who runs the Global Sovereign Open Fund said. The extra yield Australian 10-year bonds offer over similar Treasuries narrowed 38 basis points since March 31 to 1.18 percentage points, near the lowest in almost five years.

The Aussie has seen the smallest gains against the yen this year among Group of 10 currencies as investors in Japan dump the nation’s debt on concern a record commodities boom is ending. The Reserve Bank of Australia has signaled it may cut rates from an all-time low 2.75 per cent, even as the Federal Reserve considers a tapering of stimulus that may drive increases in US yields.

‘‘Australia’s position as a resource exporting country is not very good, given the significant increase in mining supply and waning demand from countries like China,’’ said Horii.

‘‘As conditions in Europe and the US improve, the money which found its way to Australia for safety is starting to unwind. Many Japanese retail investors are shifting their money from Aussie-dollar funds to US-dollar funds.’’

While many world indexes continue to power up, Australia seems to have underperformed, especially in comparison to the US. So why has the ASX's performance been lacklustre?

"The blame for Australia’s underperformance rests with earnings," said UBS strategist David Cassidy.

"While sector composition has been a contributor, earnings underperformance has been broad based. Looked at in an absolute sense, 7 of 10 GICs sectors have delivered less than 4 per cent per annum over the last 3 years."

While some companies have blamed their slide on the high Australian dollar, Mr Cassidy said it goes beyond that. Other contributing factors to earnings under-performance likely

•include relatively anaemic cost reduction initiatives;
•a variety of structural headwinds hitting sectors such as consumer discretionary and;
•more recently falling commodity prices and easing capital spending.

"Clearly the lower A$ (particularly if it continues) is a positive support for the corporate earnings cycle. From a sector perspective sectors that can benefit from a lower A$ remain attractive."

"Health Care has done very well but still looks well exposed to the lower A$ theme while Australia’s limited listed manufacturing sector (steel and building products) should do much better under a weaker currency regime. Companies that can deliver efficiency margin gains in a subdued top line environment should also continue to do well."

China’s stock-index futures fell after the central bank scrapped the floor on the rates banks can charge customers while keeping a cap on deposit rates.

Futures on the CSI 300 Index expiring in August dropped 1.6 per cent to 2,131.40.

‘‘Sentiment wise this is definitely bad for China banks, as many will comment that banks’ net interest margins will be under further pressure,’’ said Victor Wang, a Hong Kong-based analyst at Macquarie Group.

The Shanghai Composite has fallen 12 per cent this year as data from industrial production to exports pointed to a slowdown in the economy and as money-market rates reached record highs last month.

The main bit of economics news scheduled for this week is the CPI data set down for Wednesday. A Bloomberg survey of 23 economists forecast inflation remain steady at 2.5 per cent during the June quarter.

CommSec economist Savanth Sebastian said the key upside risk to inflation would be the unwinding of discounting, although low wage expectations would ensure inflation remained low.

‘‘In the March quarter, we had some of the biggest discounting we’ve seen in the retail sector for 13 years,’’ Mr Sebastian said.

‘‘But, given a modest improvement in activity, a pick-up in confidence and the fall in currency, we’ve probably seen some of that discounting being unwound, potentially adding some upside risks to the inflation forecast.

‘‘If inflation came in at 0.7 or 0.8 per cent, that would certainly concern the RBA because they know the falling Australian dollar is doing enough.’’

Mr Sebastian said the RBA was still expected to cut the cash rate again in August.

‘‘There’s no better time than straight after the inflation result to give them a reason to be cutting,’’ he said.

BC Iron has reported a record production run at its joint venture Nullagine project it operates with Fortescue.

The Nullagine Joint Venture project in Western Australia’s Pilbara region shipped 1.6 million wet metric tonnes in the June quarter, marking a 12 per cent increase on the corresponding period in 2012.

Since production began in February 2011, the mine has shipped 8.8 million metric tonnes of iron ore, and is expected to surpass the 10 million metric tonne milestone during the September quarter.

BC Iron managing director Morgan Ball said the company’s move in December, to acquire another 25 per cent of the project from Fortescue, taking BC’s share to 75 per cent, had created the momentum to improve production levels.

The Aussie dollar is also higher today. The local unit rose versus 15 of its 16 major peers as expectations of a looming reduction in US Federal Reserve bond purchases were damped, buoying demand for higher-yielding assets.

The Aussie climbed against its US peer, following comments by Group of 20 nations saying they will pursue ‘‘carefully calibrated and clearly communicated’’ policy moves and after iron prices touched the most in more than two months.

‘‘Anything over 93 cents for the Aussie and you’ve got to start accumulating shorts,’’ Joseph Capurso, a Sydney-based currency strategist at Commonwealth Bank of Australia, said in reference to bets on an asset’s decline. ‘‘The timing for Fed tapering might fluctuate, but the endpoint’s still the same.’’

The Australian dollar gained 0.6 percent to 92.26 US cents
Gold jumped more than 1 per cent to its highest level in a month on Monday as the US dollar slipped against other currencies, with gains in Japanese bullion futures adding extra support.

Gold jumped to a one-month high as reduced expectations that the US Federal Reserve will soon taper monetary stimulus weakened the dollar, while investors speculated demand may improve after China changed lending rules.

Spot gold climbed as much as 1.8 per cent to $US1,319.99 an ounce, the highest level since June 20, and traded at $US1,316.11. Holdings in the SPDR Gold Trust, the largest bullion-backed exchange-traded product, fell 0.7 per cent last week, the least since the five days to June 14.

Gold rose 0.8 per cent last week, capping the first back-to-back weekly gains since May, after Fed Chairman Ben Bernanke indicated that it’s too early to decide whether to begin scaling back bond purchases in September, weakening the dollar. The People’s Bank of China said July 19 it ended a floor on lending rates, a move that may offer consumers more spending power.

‘‘Investor sentiment toward gold seems to be turning more positive after Bernanke’s comments last week and we’re probably going to see more short-covering in the near term as the US. dollar gets sold off,’’ said Lv Jie, an analyst at Cinda Futures.

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Here's a quick look at markets around the region:

•Nikkei(Japan): -0.2%
•Shanghai: -0.2%
•Taiwan: +0.7%
•South Korea: +0.7%
•Singapore: +0.6%
•New Zealand: +0.3%

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TODAY’S FINANCIAL CALENDAR:

•(US) - Chicago Fed national activity index, Jun
•(US) - existing home sales, Jun
•(BCI) - quarterly production report
•(CUP) - Ex Div Date
•(GBZ) - EGM
•(ICP) - EGM
•(JAG) - EGM
•(MQA) - traffic stats
•(PTO) - EGM

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THIS WEEKS FINANCIAL CALENDAR:

MONDAY, July 22

Melbourne - Australian Foundation Investment Company full year results

Sydney - Macquarie Atlas Roads June quarter traffic report

TUESDAY, July 23

Perth - Fortescue Metals Group fourth quarter production

Port Moresby - Oil Search second quarter production

WEDNESDAY, July 24

Sydney - Australian Bureau of Statistics consumer price index for June quarter

Sydney - Australand Property Group half year results

Melbourne - AMCIL full year results

THURSDAY, July 25

Melbourne - Macquarie Group annual general meeting

Melbourne - OceanaGold first half results

Melbourne - Newcrest Mining quarterly results

Melbourne - OZ Minerals June quarter report

Sydney - AOFM to issue $1 billion of Treasury Notes maturing on 25 October 2013 and $1 billion of Treasury Notes maturing on 8 November 2013

FRIDAY, July 26

Brisbane - PanAust June quarter report

Brisbane - Intrepid Mines first half results

Sydney - AOFM to issue $700 million of 21 April 2023 Treasury Bonds

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THE MONDAY REPORT:

With no economic data releases to ponder on Friday, Wall Street’s attention turned solely to quarterly earnings results. It was a mixed bag, with tech stocks in particular taking somewhat of a hammering after failing to meet already lowered expectations.

Having reported after the close on Thursday, Google and chipmaker Advanced Microsystems posted earnings misses that saw their shares down 1.6% and 13% respectively. Microsoft (Dow) took a US$900m write-down on its unsuccessful tablet computer, and its shares dropped 11%. The bad news proved contagious for other tech stock majors, which also dropped in the session, leading the Nasdaq to a 0.7% fall.

General Electric (Dow) on the other hand posted a strong result that saw its shares up 4.6%. This allowed the Dow to close relatively flat, down 4 points, while the S&P managed a 0.2% gain to 1692.

The results will continue to flow next week in a season so far considered “okay”, but only with a backdrop of weak expectations. With the Fed now making it as clear as it possibly can that a QE tapering timetable will be completely dependent on the data, the focus this week will also be on data due for housing, manufacturing and durable goods in particular.

The US dollar index fell back 0.2% on Friday to 82.65 and gold jumped US$12.60 to US$1296.30/oz, looking increasingly like it wants to break back over 1300. The Aussie pushed 0.3% higher to US$0.9193, buoyed by news from China.

The world has been desperate for Beijing to ease monetary policy in the face of a slowing economy which to a great extent is being brought about by a stubborn reform agenda being adhered to by the government. On Friday the PBoC announced there would no longer be a minimum floor placed under bank lending rates, allowing banks to compete for loans and providing a potential boost for the economy.

This particular move also forms part of the reform package. The PBoC has previously controlled interest rates not by setting a target cash rate and allowing banks to make their own competitive loan/deposit rate decisions around it, but by applying a range to rates at which banks can lend and another range for which they can attract deposits.

By sticking to these ranges Beijing has underpinned the power of the big state-owned banks, but at the same time encouraged the growth of China’s shadow banking system.

Beijing is intent on smashing shadow banking, but at the same time is wary that if done so too hastily the Chinese economy could very well fall in a hole. The removal of the lending rate floor was welcomed by global markets, but at the same time there was disappointment a similar move was not made for deposits, on the topside, allowing banks to compete for funds and undermining the wealth management industry, which has built up on the shadow banking system. Beijing indicated such a move was indeed on the agenda, but will prove one of the most difficult elements to implement. The slow removal of rate-ranges is all part of Beijing’s reform agenda, which includes shifting money controls towards the market-based systems of the West.

One might have expected a positive response from the LME on the Chinese news but as the metals trade winds down for the northern summer, volumes have begun to wane. The weaker US dollar allowed aluminium and nickel to rise 1% but the other metals were little moved.

Spot iron ore finally had a down-day on Friday after the strong rally, falling US20c to US$131.70/t.

The oil markets did pay some attention to the news from China, but continued to focus on developments in volatile Egypt. West Texas rose US43c to US$108.05/bbl to mark a 15% rise over four weeks. If it pushes above 110, Wall Street will begin to worry about an energy cost drag on the US economy. Brent rose US60c to US$109.36/bbl.

The SPI Overnight rose 21 points, or 0.4%.

Europe was back in the news on the weekend. With the Portuguese coalition government having recently fractured on disagreements over austerity the parties met to nut out a balance between meeting the troika’s strict requirements for its bail-out package and addressing the country’s sinking economy and 17% unemployment rate. Unsurprisingly this proved an impossible task, forcing the president to step in a Sunday and insist the parties lock themselves in a room and not come until some agreement is reached.

The president’s move has affected a sigh of relief across global markets as is staves off the need for a national election, which may have seen Portugal shift away from austerity and risk its bail-out funds at a time it appears the country may need a second package after the first expires at the end of this year. The situation nevertheless remains volatile, just as it has in Italy and Greece. The real test will come in September when Germany goes to the polls.

On the other hand, the Japanese upper house election held on Sunday saw Shinzo Abe’s party win in a landslide that provides a majority in both Japanese houses for the first time since 2007. This will provide the government with the firepower it needs to push through further fiscal reforms, although observers are now worried the size of the mandate might mean Abe sees no need to rush through reforms and instead his nationalist, militarist agenda may enjoy greater attention.

Japanese markets in be closely watched today.

The US earnings season will step up a gear this week with highlights including Dow components AT&T, DuPont, Travelers, United Technologies, Boeing, Caterpillar, Ford and 3M along with Apple, UPS, Facebook, Visa Colgate-Palmolive, General Motors and Starbucks among many others.
On the economic front, tonight sees existing home sales and the Chicago Fed national activity index and tomorrow the FHFA house price index and the Richmond Fed manufacturing index. Wednesday it’s new home sales and a flash estimate of the July manufacturing PMI, Thursday durable goods, and Friday consumer sentiment.

The Eurozone will also see a flash PMI on Wednesday, while Thursday brings the German IFO business sentiment survey and the first estimate of the UK June quarter GDP.

On Wednesday HSBC will release its flash estimate of China’s July manufacturing PMI. Beijing has now suspended the publication of its own PMI measures so for better or worse, HSBC’s figures now become the sole benchmark.

Australia’s economic week is dominated by one major release only, the June quarter CPI. The market is looking for headline growth of 0.5% for the quarter and 2.5% annual.

The resource sector production reports continue this week with BC Iron (BCI) today, Fortescue (FMG), Mirabela Nickel (MBN) and Oil Search (OSH) tomorrow, Drillsearch (DLS), Newcrest (NCM), OceanaGold (OGC) and OZ Minerals (OZL) on Thursday and PanAust (PNA) on Friday.

The Australian result season begins in earnest next month but there are always a few early birds. This week sees result from Australand Property (ALZ) on Wednesday and GUD Holdings (GUD) on Friday.

BROKER ALERTS (2 x SFR, 7 x STO):

BA-Merrill Lynch rates STO as Buy, Medium Risk (1) -

Target $16.40 (was $16.56). The broker has cut its 2013 earnings on the back of lower production forecasts and higher charges. While the production downgrade has admittedly weighed on the share price, positive commentary on the company’s LNG Projects, especially PNG LNG, the broker sees progress as being a more important stock price driver than production deferments.

The broker has brought forward first LNG to 2Q14 from 4Q14 and has also lowered its cost estimate to US$19bn. Both represent clear positives, says Deutsche Bank. Although, the lower production forecasts do see the price target trimmed.

Target price is $16.40 Current Price is $13.74 Difference: $2.66

If STO meets the BA-Merrill Lynch target it will return approximately 19% (excluding dividends, fees and charges).
The company's fiscal year ends in December. BA-Merrill Lynch forecasts a full year FY13 dividend of 30.00 cents and EPS of 64.90 cents. At the last closing share price the estimated dividend yield is 2.18%.

At the last closing share price the stock's estimated Price to Earnings Ratio (PER) is 21.17.

Market Sentiment: 0.5

Deutsche Bank rates SFR as Buy (1) -

Target $7.00 (was $7.60). The broker though the company first full year of production ended strongly, with FY production in line and running at 64kt copper and 43koz gold being produced. The broker notes the concentrator is now at full capacity, although mining is still ramping up.

FY14 production and cost guidance was in-line with the broker’s forecasts, however the future capex has come in well above expectations, taking a chunk out of the valuation. The broker isn’t that worried, saying this is the cost of delivering a simple story. Buy call maintained.

Target price is $7.00 Current Price is $5.51 Difference: $1.49

If SFR meets the Deutsche Bank target it will return approximately 27% (excluding dividends, fees and charges).
The company's fiscal year ends in June. Deutsche Bank forecasts a full year FY13 dividend of 0.00 cents and EPS of 59.00 cents.

At the last closing share price the stock's estimated Price to Earnings Ratio (PER) is 9.34.

Market Sentiment: -0.1

UBS rates SFR as Buy (1) -

Target $7.00 (was $8.10). June quarter copper and gold production fell a bit short of the broker, with full year output also falling a tiny but short of guidance. UBS notes the DeGrussa mine ramp up progressed well, with 1.5Mtpa still expected at the end of the September quarter. Cash costs were higher, but UBS notes higher costs are not uncommon during ramp up.

Accounting for the new guidance sees FY14-15 EPS forecasts cut by 28% and 31%. The price target is lowered, while the Buy call is maintained, UBS citing valuation.

Target price is $7.00 Current Price is $5.51 Difference: $1.49

If SFR meets the UBS target it will return approximately 27% (excluding dividends, fees and charges).

The company's fiscal year ends in June. UBS forecasts a full year FY13 dividend of 0.00 cents and EPS of 64.00 cents.

At the last closing share price the stock's estimated Price to Earnings Ratio (PER) is 8.61.

Market Sentiment: -0.1

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Citi rates STO as Buy (1) -

Target $17.93 (was $17.99). Santos has downgraded CY13 production guidance by 3% on a mixture of production constraints at Chim Sao, field declines in Bangladesh and workovers at Carnarvon oil. Operating costs were also guided to the top of the range.

The broker notes GLNG is moving along well, now around 60% complete and on time and budget, while PNG LNG is approaching 90% complete. And in the meantime, East Coast gas prices are rising, increasing the value of the Cooper Basin. In short, it just isn’t that worried and still sees the stock as being the best value large cap E&P stock around.

Target price is $17.93 Current Price is $13.74 Difference: $4.19

If STO meets the Citi target it will return approximately 30% (excluding dividends, fees and charges).

The company's fiscal year ends in December. Citi forecasts a full year FY13 dividend of 30.00 cents and EPS of 63.00 cents. At the last closing share price the estimated dividend yield is 2.18%.

At the last closing share price the stock's estimated Price to Earnings Ratio (PER) is 21.81.

Market Sentiment: 0.5

Credit Suisse rates STO as Downgrade to Underperform from Neutral (5) -

Production guidance has been lowered to 52-55mmboe from 53-57mmboe for FY13. Multiple reasons have been given such as Chim Sao power constraints, natural field decline at Sangu and deferred Carnarvon oil because of weather and workovers.

The next two years will be exciting for Santos in Credit Suisse's view, as it ramps up LNG projects. The stock is viewed as fully valued, especially given the risk that remains for further cost overruns.

The rating is lowered to Underperform from Neutral, with less than 5% total upside seen. The price target is retained at $14.00.

Target price is $14.00 Current Price is $13.74 Difference: $0.26

If STO meets the Credit Suisse target it will return approximately 2% (excluding dividends, fees and charges).
The company's fiscal year ends in December. Credit Suisse forecasts a full year FY13 dividend of 30.00 cents and EPS of 53.02 cents. At the last closing share price the estimated dividend yield is 2.18%.

At the last closing share price the stock's estimated Price to Earnings Ratio (PER) is 25.91.

Market Sentiment: 0.5

Deutsche Bank rates STO as Buy (1) -

Target $14.70 (was $15.70). June quarter production came in 9% short of the broker, with reduced gas nominations from customers across the Cooper Basin, Carnarvon and Indonesia doing much of the damage. The broker says the lower demand is due both to the current environment of soft demand for gas in Australia and also the very mild start to winter weather in the southern states.

The weak second quarter and production issues at Chim Sao, Sangu and Carnarvon saw the company downgrade CY13 production guidance, seeing Deutsche Bank cut its own forecasts. Otherwise, cost, tax and capex guidance were unchanged, although full year production costs will still come in at the top end of the $630-660m guidance range. The Buy call is maintained.

Target price is $14.70 Current Price is $13.74 Difference: $0.96

If STO meets the Deutsche Bank target it will return approximately 7% (excluding dividends, fees and charges).
The company's fiscal year ends in December. Deutsche Bank forecasts a full year FY13 dividend of 30.00 cents and EPS of 58.60 cents. At the last closing share price the estimated dividend yield is 2.18%.

At the last closing share price the stock's estimated Price to Earnings Ratio (PER) is 23.45.

Market Sentiment: 0.5

JP Morgan rates STO as Overweight (1) -

The June quarter production report was a little soft but JP Morgan expects it to be a minor bump in the road to a very strong production ramp up over 2013-16. Cooper and WA gas production was disappointing but gas pricing was strong.
The extensive Cooper expansion that is underway is expected to provide substantial increases in gas from 2015, while pricing is expected to continue to improve on the east coast over the next 18 months.

The Overweight rating is retained and the price target is reduced to $17.73 from $18.02.

Target price is $17.73 Current Price is $13.74 Difference: $3.99

If STO meets the JP Morgan target it will return approximately 29% (excluding dividends, fees and charges).
The company's fiscal year ends in December. JP Morgan forecasts a full year FY13 dividend of 30.00 cents and EPS of 66.00 cents. At the last closing share price the estimated dividend yield is 2.18%.

At the last closing share price the stock's estimated Price to Earnings Ratio (PER) is 20.82.

Market Sentiment: 0.5

Macquarie rates STO as Outperform (1) -

June quarter production was below Macquarie's expectations, driven by lower contributions from the Cooper, Carnarvon and Indonesia. Revenue was partly saved by strong gas realisations.

Macquarie, while acknowledging it was not Santos' best quarter operationally, does not feel the news warranted the significant share price sell off. Instead, the broker believes the selling stemmed from the recent rally which was provoked by the merger & acquisition speculation and optimism over the Winchester discovery.

The Outperform rating is maintained and the price target is steady at $16.50.

Target price is $16.50 Current Price is $13.74 Difference: $2.76

If STO meets the Macquarie target it will return approximately 20% (excluding dividends, fees and charges).
The company's fiscal year ends in December. Macquarie forecasts a full year FY13 dividend of 30.00 cents and EPS of 78.00 cents. At the last closing share price the estimated dividend yield is 2.18%.

At the last closing share price the stock's estimated Price to Earnings Ratio (PER) is 17.62.

Market Sentiment: 0.5

UBS rates STO as Downgrade to Neutral from Buy (3) -

June quarter production may have come in 2% higher than the March quarter, but it still fell well short of UBS’ expectations. Sales revenue missed by 13%. The broker notes a planned increase in Cooper gas production never came about, while Fletcher and Finucane problems in late June also hurt both production and sales.

The 2013 production guidance was cut by 3% due to production issues in Vietnam, Bangladesh and Carnarvon Basin. On the other hand, the broker does note PNG LNG is almost 90% complete and ready for commissioning gas in the next few months, while the drilling rate at GLNG has been increased.

It isn’t enough to stop the recommendation from being cut to Neutral, especially after the 24% run in the share price since the start of 2013. The $14.00 price target is maintained.

Target price is $14.00 Current Price is $13.74 Difference: $0.26

If STO meets the UBS target it will return approximately 2% (excluding dividends, fees and charges).

The company's fiscal year ends in December. UBS forecasts a full year FY13 dividend of 30.00 cents and EPS of 73.00 cents. At the last closing share price the estimated dividend yield is 2.18%.

At the last closing share price the stock's estimated Price to Earnings Ratio (PER) is 18.82.

Market Sentiment: 0.5

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Here's a quick chart: A pick-up in the Chinese economy will not be on the cards unless the falling trend in freight volumes is arrested.