Australia | Sep 15 2014
By Mathan Somasundaram, Baillieu Holst Quant Strategy
Summary: Aussie market started negative and remained negative with global sentiment. We continue to be negative in the short term as the markets had run ahead of valuation, rising geopolitical risks, China tightening, stocks going ex div, escrow shares taking marginal buying and ECB delivering nothing new for now. The market is currently waiting for clarity from US Fed on their interest rate outlook expected in the next 2-3 days. We are also heading toward school holiday break at the end of the week when the market will be handed over to the predominantly retail investors.
Iron Ore stabilised at US$82 and we expect it to hit closer to US$80 before recovering to US$90 over time. BHP and RIO are now buy ideas when you look at the supply/demand and volume/margin dynamics. Given the drop in energy prices and the valuation of the energy stocks, STO and WPL are likely to see selling pressure to fund BHP and RIO. AUDUSD has finally popped below 90 cents…but not enough momentum to go further down yet.
Globally FOMC comments will dictate interest rate outlook and Scotland vote to set UK outlook. We continue to feel that there will be a small wobble and then markets will get over the interest rate cycle similar to tapering. We also feel that the Scotland vote will be a “NO” given the structural system links with UK. Locally we have pretty much set the path for troops to enter Iraq again. All the US aligned countries have signed off in the next version of Iraq war and it will have to move to the land phase to get anything done.
Between the falling commodity prices, senate debacles and cost of war, Treasurer will have to deliver his first downgrade after his first budget…more things change, the more they stay the same.
Trading idea of the day: BlueScope Steel (BSL) – BSL is a flat steel producer and supplier of steel products and solutions focused on the global building and construction markets. It operates in four main geographical regions being Australia, New Zealand, Asia and North America. We see the stock re-rating to $6.30 with falling Iron Ore price and depreciating currency after years of structural changes and cost out programs. Given the improved balance sheet and operational efficiency of BSL compared to the margin pressure on small cap Iron Ore miners, BSL is currently placed well in any consolidation in the sector.
Market Move: Aussie market was down 1.04% with turnover was just below $5.0bn.
Macro Events: Tonight – US August industrial production. Tomorrow – RBA board’s September 2 meeting minutes, weekly consumer sentiment, RBA assistant governor Christopher Kent speaks on the economy in Sydney, ABS September-quarter commodities report, US August producer prices, US Federal Reserve FOMC begins two-day meeting.
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