MARKETS SPECTATOR: Soft touch

Analysts say weakness in mining services stocks could spread to other sectors, potentially causing the market to fall.

Downgrades. That’s the focus of the trading desks after a string of cuts to profit forecasts by mining services companies such as Transfield, WorleyParsons, UGL and Fleetwood.

One salesman says there is a “complete fixation” on whether other companies in non-mining sectors may follow the likes of Transfield. Lingering signs of continued softness in consumer spending may be a bad signal for media companies, as TV and newspaper businesses may also be a victim of a lack of advertising spending.

The Reserve Bank’s rate cuts have yet to feed through to the economy, traders say. Nomura forecasts two more rate cuts by the central bank and expects the cash rate to be at 2.25 per cent later this year, down from the current 2.75 per cent. That may indicate the economy and companies are in a slump lasting longer than the Reserve had expected it would.

Cost cutting by the likes of BHP Billiton and Rio Tinto may help their bottom lines. But for Australian mining stocks to rise foreign investors need to be convinced that China’s economy is rebounding and approaching growth rates of past years, according to trading desks. That doesn’t seem to be the case, the traders say, and is probably keeping a lid on any rebound in resource stocks.

On banks, the attraction of their shares to investors on the basis of their dividend may be slowing, traders say.

This points to an S&P/ASX 200 Index ripe for a fall. The index, up 26 per cent in 12 months, is trading above its 20-year average, analysts at Citigroup and UBS say. Few analysts are willing to make a forecast for the market to make further gains.

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