Westpac and strong Yen delivery get the week off to a nervous start
Westpac’s miss on headline expectations has set the tone for a nervous market this morning.
While the Westpac’s result is only marginally below expectations, the market will be concerned that it is struggling to get cost growth down to previous target levels of 2-3%. The increase in bad debt provisions is a bit larger than generally expected. However, this was mainly about 4 large corporate debtors and problems in this area had previously been flagged to the market.
Although the market may be disappointed by today’s weaker than expected result, there doesn’t appear to be anything in it that will seriously alarm investors from a medium term point of view. Despite the outlook for some moderation in housing investment and deterioration in consumer delinquencies, the bank goes into this stage of the cycle in good shape. It should benefit from ongoing GDP growth and a sound employment market.
Telstra’s announcement that its capital management plan will involve at least $1.5m provides a little more clarity around its plans. However, future announcements on growth options are now a more significant issue for this stock.
While China’s official PMI’s were a little below expectations for April, they continue to reflect the benefits of economic stimulus. The fact that the manufacturing PMI has held above 50, reflects recent improvement in the steel industry.
However, markets appear to have become a bit cautious about assuming further significant improvement from current levels in steel and other commodities. The spot iron ore price rose strongly to $US 66.24 on Friday but this may have limited impact on mining stocks. Investors are now looking at spot prices as being in a volatile range between $55 -70 and are less sensitive to fluctuations within this range. They are waiting for more visibility on whether this price range is sustainable.
Japanese investors return from a 3 day weekend to face a strong rally in the Yen. The size of the resulting sell-off in the Nikkei is likely to impact regional sentiment today.
Frequently Asked Questions about this Article…
Westpac's results were slightly below expectations, mainly due to challenges in reducing cost growth to target levels and an increase in bad debt provisions. This has caused some market concern, although the issues were previously flagged and are not expected to alarm investors in the medium term.
The increase in Westpac's bad debt provisions is primarily related to four large corporate debtors. While this was larger than expected, it was anticipated by the market and is not seen as a major concern for medium-term investors.
Telstra's announcement of a $1.5 million capital management plan provides clarity on its financial strategy. However, investors are now more focused on future growth options, which are seen as more significant for the stock's outlook.
China's PMI data, although slightly below expectations, still reflects the positive impact of economic stimulus. The manufacturing PMI remaining above 50 indicates improvements, particularly in the steel industry.
Despite a strong rise in the spot iron ore price to $US 66.24, mining stocks may not see significant impact due to the current volatile price range of $55-70. Investors are cautious and waiting for more stability in these prices.
A strong rally in the Yen led to a sell-off in the Nikkei, which is likely to affect regional market sentiment. Japanese investors returning from a three-day weekend faced this currency strength, influencing market dynamics.
Despite some short-term concerns, the market is not seriously alarmed about Westpac's medium-term outlook. The bank is expected to benefit from ongoing GDP growth and a stable employment market, even with some moderation in housing investment.
Investors are cautious because, despite recent improvements, there is uncertainty about the sustainability of current price levels in steel and other commodities. They are waiting for more visibility on whether these improvements can be maintained.
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