Australian Stock Market Report - Midday May 11, 2015

• Local shares are edging higher in early trade on Monday as investors tread warily. The volatility of last week has left its residue on investors who have witnessed the biggest weekly decline for the ASX 200 since June 2013. The improved tone for local stocks has come at the hands of better performances for US and European stocks at the week end. Central to the improved tone was US economic data, which revealed that non-farm payrolls (employment) rose by 223,000 in April, near market forecasts. But March job growth was revised downward by 41,000 to growth of only 85,000. The unemployment rate fell from 5.5% to a 4-year low of 5.4%. Average earnings rose by just 0.1%. As a consequence US sharemarkets rose on Friday. While the firm jobs data highlighted a healthy economy, data wasn't strong enough to create grounds for the Federal Reserve to bring forward the timing of rate hikes. The Dow Jones rose by 267 points or 1.5% with the S&P 500 index up by 1.4% and the Nasdaq gained 58 points or 1.2%. Over the week the Dow rose by 0.9%, the S&P 500 rose by 0.4% while the Nasdaq fell by less than 0.1%. European shares rose on Friday with investors encouraged by US employment data and the decisive UK election result. The FTSEurofirst 300 rose by 2.8% with the German Dax up by 2.7% while the UK FTSE lifted by 2.3%. Mining shares also rose in London trade with BHP Billiton up by 1.5% while Rio Tinto lifted by 1.0%.

• The equilibrium for the market saw on the one hand weakness in the financials that was being balanced by gains for mining and energy stocks. The latter group has been supported after oil prices continue to edge higher in recent days. Prices are being underpinned by the belief that US supply and demand will come into some balance after the US Energy Information Administration (EIA) estimated US crude oil output will lift from 8.68mb/d to 9.23mb/d in 2015,which is 120kb/d lower than the group’s previous forecast in March. The group expects US crude oil output to fall in 2H15 as the decline in US oil rigs finally of fsets the impact of improving well and rig productivity, boosting hopes that the surplus in crude oil markets will ease.

• Mining stocks have been helped by news that Chinese authorities remain focussed on stimulating the economy. The People’s Bank of China (PBOC) cut the one-year lending rate by 0.25 percentage points to 5.1%. The PBOC also cut the one-year deposit rate by 0.25 percentage points to 2.25% but raised the deposit-rate ceiling to 150% of the benchmark from 130% of the benchmark. The PBOC cited “relatively large” downward pressure on the economy and subdued inflation in Q&A after the rate cut. This is the PBOC’s third interest rate cut in six-months. Iron ore prices continued to strengthen with prices up 1.7% on Friday to US$61.4/t CFR after China’s iron ore port stocks fell in April to their lowest level since January 2014.

• In company news, fertiliser and explosives maker Incitec Pivot has reported that first-half net profit rose 27 per cent from a year ago to $146.4 million, buoyed by the weaker Australian dollar. Earnings before Interest and Tax (EBIT) increased by 12% or $22.5m to $215.6m which compares to a figure of $193.1m for the same last year. Fertilisers EBIT was up 18%, at $59.0m against a figure of $49.8m in the previous corresponding period (pcp). At the same time, Explosives EBIT was up 5% to $168.1m (pcp: $159.8m). Sales revenues increased by 6% or $86.5m to $1,594.9m (pcp: $1,508.4m). IPL does not provide profit guidance, due to the variability of global fertiliser prices and foreign exchange movements. There was no material change from the full year outlook provided in November 2014. IPL shares were at $3.78 down 13 cents or 3.3%.

• The AUD/USD should continue to consolidate this week although it could feel the weight of a slightly firmer USD later in the week in response to some modest upside risks to the USD. The weekend’s PBoC interest rate cut following the lower than expected Chinese April CPI confirms the authorities still believe the economy requires some stimulus activity given China’s broad-based trade links with the rest of the world.

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