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.  


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