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Although yesterday was a small retreat of 26 points the fact the ASX was unable to hold onto the 61.8% retracement level of the 2007 high to the 2009 low, closing below 5426, suggests resistance may have been found and that November may be a weak month after such a strong upward run over the last four months.
The results from ANZ were solid; the dividend yield, coupled with guidance for a medium term payout ratio of 65% to 70%, pleased investors and saw a switch trade from CBA in the search for yield and also out of NAB and Westpac as earnings beat estimates. It’s this switch out of WBC and NAB that is most interesting.
NAB is up almost 47% over the last 12 months and a pullback would normally not be a red flag, however with only 24 hours to its results and the history of NAB’s trade heading its results I feel the market could be expecting an in-line number rather than a bumper one, and could be a sell-the-fact figure. Expectations are for very low net interest margins so the market will need to see strong growth in deposit and deal flow in lending as it cuts lending rates to keep ahead of the market. The payout ratio of 75% also seams high, and if NAB cannot reach this payout, investors will shed the stock.
The moves in WBC could see a similar conclusion being drawn; the company is leading the big four over the past 24 months, up 74%, so yesterday’s pull back was marginal in comparison. However, they too tend to rally into results and then pull back after the fact.
The company made a record high on Tuesday and expectations are at fever pitch for a special dividend considering the mass franking credits which will be sitting on its balance sheet at the time of Monday’s results. However, questions around cost to income ratios, possibly poor volume growth in the key market of lending and a very flat net interest margin – as competition for deposits grows – could weigh on the Sydney-based bank.
I see in-line results for these two major banks as a possible switch move in the market and considering how much point value all four banks control in the market, the pullback I see in November is likely to come from this area. I am still medium-term bullish on the market as the Asian story continues to perform admirably in the face of some tough analyst assumptions, however I feel the current situation is priced to perfection and a pullback is needed in order to take a bit of the hot money out of crowded trades.
Ahead of the Australian open
Yesterday’s speech by RBA Governor Glenn Stevens was a lot more eventful than I expected; the release of his speech before his address saw the AUD/USD smoked and then continue its downward trend as he spoke and for the rest of Asian trade.
It was very interesting to hear his take on the housing market and his belief that it’s premature to call it a bubble or even overheating. The fact he sees the AUD as too high and believes that if the Fed continues to pump USD into the market the RBA may be forced to act and cut once more was also an interesting inference.
It is likely that rates will remain on hold for the remainder of 2013, however the RBA isn’t as neutral as some had believed, and the possibility of a rate hike looks like being pushed back into mid to late 2014, rather than early 2014.
Markets were again tepid overnight as earnings season ploughed on; most markets are in the green which should be a good lead for local trading. The release of the ADP non-farm payrolls tonight, however, may have a bigger bearing on trade over the next 24 hours as we look to the Fed cash rate and press conference tomorrow morning for what should be a complete non-event (and should be priced in).
Ahead of the open we are calling the ASX 200 up 33 points to 5449 (+0.61%) as the ASX looks to retest the resistance level of 5426. BHP’s ADR is suggesting the stock could rise some 27 cents to $37.86 (+0.72%) as it recoups some of yesterday’s losses.
If the market is indeed heading higher, it is the material and energy pace that will drive this move; BHP is key here and needs to break out of its resistance at $38.50 and $39.00. If it can do this in the next five weeks then clear sky is back on the cards for the world’s largest mining company.