ASX looking for higher highs

Since the low on 25 June, the ‘great rotation’ as it has been commonly dubbed has not only gained momentum but is almost the only trade to be in.

The optimism from the US and the stabilisation for China has seen commodities prices – since the low – steadily rising as demand for industrial metals, iron ore and energy rise.

The ASX has managed to buck global trends over this time and barring the blimp last Wednesday and the volatile moves at the start of the rally, the ASX has seen plain sailing in the north direction for the last eight weeks.

However, it’s the sectors of the market which are driving that move that have been very interesting; as energy and materials dominate. Since the low on 25 June (also the year-to-date low), BHP Billiton (BHP), Rio Tinto (RIO), Fortescue Metals Group (FMG), Newcrest Mining Limited (NCM) and the bottom pivot point for the energy plays Santos Limited (STO), Woodside Petroleum Limited (WPL) and Oil Search Limited (OSH) have all rallied hard.

The percentage point gains from the intraday lows tell the story; BHP 21.66%, RIO 24.95%, FMG 50.17%, NCM 36.75%, WPL 15.58% and STO 16.64%. The ASX from the same point has rallied 10.28% and is now up 9.89% year-to-date.

Having seen a massive ‘confession season’ over the May to June months, the second blessing for these stocks over the coming weeks of earnings season is that the confession season has lowered consensus estimates and pricing.

Yesterday is a prime example; United Group Limited (UGL) had a massive downgrade in May and even with net profit actuals coming in at the lower end of company guidance, it was a slight beat on consensus estimates. That, coupled with the demerger of its most profitable division, saw the stock shifting gear to jump up 1.62% at the close and it was up as much as 4.72% during the day.

The likes of BHP and FMG have seen underlying commodity estimates lowered to US$120 a tonne in the case of iron ore, with industrial metal estimates as much as 15% lower than current trading prices. This other major point analysts are concentrating on is cost cutting and consolidation.

In the case of BHP, only three weeks ago it released its fourth quarter sales and production numbers that saw a record iron ore number. That, coupled with a year-to-date iron ore price of US$131 a tonne (an US$11 plus side difference), means that the current rally is banking on an upside surprise. This move in BHP has put it back within striking distance of Commonweath Bank of Australia’s (CBA) market cap and the top position as the largest listed company on the ASX, which currently sits at $118 billion.

Today sees another five companies in the ASX 200 reporting to the market, with ten tomorrow (the big one being CBA). Once more the most interesting sector to watch will be the mining services sector. The release of Bradkin’s results today (one of the only players in this space to escape ‘confessing’) will be a window into how the space as a whole is tracking.

Expectations are for EBITDA of $210 million to see underlying net profit touching $92 million. What the market will want to hear is guidance. Pipeline orders and expectations for the coming year will be key for the sector going forward, as the big end of the mining town winds down discretionary spending. That will also mean looking out for possible diversifications, spin off and consolidations as the companies look to navigate the tough times ahead.

Moving to the open, we are calling the ASX 200 up six points to 5114 (+0.10%) as it manages to buck the choppy lead from both the US  and European trade. BHP’s ADR is suggesting the stock should move to a five month high on the open, up 18 cents to $37.03 (+0.48%), and will lead the material sector higher.

The iron ore price comes back online today with Singapore back from holidays yesterday; the last official print was on Wednesday at $133.10 a tonne and the tonnage price at the close of yesterday has seen the price jump to $138.70 a tonne. Expect this to stabilise over the next two days.

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