Weekly Commentary

by Raymond Chan

We wrote this article at Hong Kong Airport, awaiting for our flight back home. We have been visiting a number of institutional investors and private investors during this trip in Hong Kong and Guangzhong. We will provide our feedback over next 2 weeks.

Over the week, our market posted solid gains after encouragement from US quarterly results. Major overseas markets were also strongly with Chinese second-quarter growth dousing fears of a 'hard landing' and corporate earnings beating estimates. The US market overcame weak retail sales to rise on the back of better than expected results from financials and technology stocks and speculation that central banks may enforce stimulus to boost the world's largest economy. European stocks also rallied during the week, buoyed by well-received earnings reports from companies such as Akzo Nobel NV, Nokia Corp, Credit Suisse Group AG and Nordea Bank AB.

Locally we saw a round of strong quarterly results from our major Resource stocks with BHP Billiton, Rio Tinto and Fortescue Metals all posting positive commentary on the outlook for commodity demand. The stand-out however was Woodside Petroleum who surprised the market with upgraded production target primarily driven by Pluto and higher reliability from other core assets.

Another dynamic affecting the local market is the persistently high Australian Dollar. We note the continuing trend of global central bank reserve accumulation and, with short yields turning negative across many safe havens, we see re-weighting of those reserves into non-traditional currencies like the AUD. This has resulted in a diverging trend between commodity prices and the currency, with negative implications for corporate profitability for our exporters.

The RBA's July board meeting minutes echoed an improved sentiment in global economic conditions. Overall, the bank appears to be a little more upbeat about the medium-term prospects for both China and the domestic economy. Europe clearly remains a concern that is unlikely to diminish for some time and the slowdown in the US now appears to be weighing on global growth prospects. A range of indicators on China suggested that the economic slowdown is easing whilst the property market is showing tentative signs of stabilisation. It seems likely that after easing policy over the past 8 months, the RBA will sit on its hands for the time being and see how developments play out overseas before adjusting policy again  



From our Option Desk ... brought you three option ideas for the week.

Position One:                Sell WPL Sept 31.50 / 29.50 put spread at 58 cents credit

Current Share Price:        $32.95
Research Target Price:        $41.25

Woodside's share price has bounced from the $30 level amidst renewed buying interest post the recent second quarter production numbers.  
The stock was up strongly yesterday despite a significantly weaker oil price.


Position Two:                Sell FMG Aug $4 puts at 24 cents
Current Share Price:        $4.04
Research Target Price:        $6.76

Fortescue's share price has fallen sharply from $4.80 since the beginning of July (circa 20%) amidst reports of falling steel prices in China.
Looking at a long term chart, $4 has proved a decent buying level for the past few years.


Position Three:        Sell WES Aug $33 calls at 26 cents
Current Share Price:        $32.22
Research Target Price:        $26.20

Wesfarmer's (WES) will report fourth quarter sales numbers tomorrow, these are expected to be solid given the Woolworths sales numbers on Monday.
The WES share price already trades at a PE premium over Woolworths stock.  

Disclaimer

Information/strategies/trading ideas in this blog is provided for general information purposes only and is not intended as an offer to enter into any transaction. Information contained in this blog is not necessarily complete and its accuracy cannot be guaranteed. Information/strategies/trading ideas here have been prepared without consideration of the investment objectives, financial situation or particular needs of any individual investor. Before a client/investor/reader makes an investment decision, a client/investor/reader should, with or without RBS Morgans' or the author’s assistance, consider whether any advice contained in this blog is appropriate in light of their particular investment needs, objectives and financial circumstances. It is unreasonable to rely on any recommendation without first having spoken to your adviser for a personal recommendation. The use of options may not be suitable for all investors. Potential investors are recommended to seek professional advice before embarking on any strategies mentioned in this blog. The information/strategies/trading ideas contained in this blog have been taken from sources believed to be reliable. Neither the author nor RBS Morgans Limited represent that the information is accurate or complete nor should it be relied upon as such. Any opinions expressed reflect the author’s judgment at this date and are subject to change and is not necessarily that of RBS Morgans'. RBS Morgans and/or its affiliated companies may make markets in the securities discussed. Further, RBS Morgans and/or its affiliated companies and/or their employees from time to time may hold shares, options, rights and/or warrants on any issue included in this blog and may, as principal or agent, sell such securities. The Directors of RBS Morgans Limited and Grosvenor Sydney office advise that they and persons associated with them may have an interest in the above securities and that they may earn brokerage, commissions, fees and other benefits and advantages, whether pecuniary or not and whether direct or indirect, in connection with the making of a recommendation or a dealing by a client/investor/reader in these securities, and which may reasonably be expected to be capable of having an influence in the making of any recommendation, and that some or all of our representatives may be remunerated wholly or partly by way of commission. Information in this blog is proprietary to its author and may not be copied as your own or used for any other purpose without the prior written consent of the author. RBS Morgans Limited (ABN 49 010 669 726 AFSL 235410) A Participant of ASX Group Principal Office: Level 29, Riverside Centre, 123 Eagle Street, Brisbane QLD 4000