(THURSDAY 16TH JUNE - 08.38 - JAMES GERRISH)...The US market was hit by another round of negative news flow with an emergency meeting of EU Finance Ministers failing to make any firm agreement on further support for Greece. PM George Papandreou is facing a harsh backlash against austerity measures offering to step down in a reshuffle that could take place tonight. Greece need to confirm their commitment to costs savings for the EU & IMF to agree on any additional support - which is crucial for Greece to avoid a default. This news broke prior to the US session opening and sent US Futures down more than 120pts.
When the US came on line, there was further negativity with some manufacturing data below expectations and inflation higher than the market was anticipating (although still at a very benign 0.3% on the core measure) and without anything remotely positive (accept the valuation call) to go on, stocks fell.
The DOW JONES lost -178 pts while the S&P 500 fell -1.74%. Our FUTURES market this morning is pricing in a drop of -53 points when trading kicks off.
It actually seemed the local market (S&P/ASX 200) was trying to round off and find support at current levels particularly given we're at the bottom of its trading range. There are however a couple of issues going against this scenario that could be a hindrance.
To me, the USD looks like its finding support at current levels and is threatening to break its down trend. You can see the higher low structure on the chart below which can signal a change of trend. Don't forget that currencies are highly leveraged and traders are short the USD. Any bounce will be a big one. At this stage, the Fed has pretty much watered down QE3 and as long as Benanke plays coy with this, it will be supportive of the Greenback.
A rise in the USD is likely to be a negative for the commodity markets and this was very obvious overnight. We suggested that a break of 333 on the commodity index below, would trigger a sell in that market and prompt us to reduce exposure in commodity producers here - and potentially reallocate into stocks that will benefit from a higher USD. (we added QBE to the Aussie Equities Portfolio yesterday)
The Aussie Dollar is also interesting and we saw a short term spike in the currency after RBA Governor Glenn Stevens spoke yesterday and basically said that interest rates would need to be increased in the months ahead. From my perspective I still think they'll hold for longer. The Aussie continues to trade at the mid point of its range ($1.10 to $1.02) with the bias to trade to the lower levels first.
We were also looking at the Volatility Index and the Chinese Market. Overnight, the VIX spiked above 20 which was the level we were looking at, while the Chinese Market has remained above support (so far).
QBE INSURANCE (QBE)
We got a market update from QBE yesterday and this pretty much came in as a profit downgrade. Natural disasters have obviously been a major factor here and this has prompted QBE to lower margin guidance. We've been looking for an entry point into QBE sub $17 for some time now and $16.60 seemed a good one yesterday. The stocks yielding almost 8% and trading on about 9 times forward earnings. The stock has been hit by a host of factors namely natural disasters, low US interest rates, and a high Aussie. If we do see the USD bounce and QE3 doesn't come to fruition, QBE will be a major beneficiary.
From the update yesterday....
NPAT expected to be 50 to 60% higher than 1H10 of US$440m. which suggests net earnings between US$660m and US$704. (obviously subject to the normal things such as currency, storms etc etc). 1H11 dividend is expected to be maintained at 62c.
The unprecedented level of catastropheclaims in 1H11 will see the 1H11 insurance margin below the 15.7%c achieved in 1H10. QBE's top line - Gross Earned Premium (GEP) and Net Earned Premium (NEP) are on target for growth of over 27% and 30% respectively.
The result was obviously a disappointment however for those with a medium term view, this could provide an attractive entry.
AUSTRALIAN DUAL LISTED STOCKS
In New York, News Corp fell by US$0.30 to US$16.80, equivalent to A$15.88, A$0.06 above its last close on the ASX.
ResMed fell by US$0.75 to US$30.45, equivalent to A$2.88, A$0.02 below its last close on the ASX.
In London, Rio Tinto fell 32.5 pence to £41.12, A$0.50 lower in Australian currency terms.
BHP-Billiton fell 26.5 pence to £22.84, A$0.41 lower in Australian currency terms.
Henderson Group Plc fell 1.3 pence to £1.42, A$0.02 lower in Australian currency terms.
