NAB first out of the blocks to cut rates
Comment of the Day

May 02 2012

Commentary by Eoin Treacy

NAB first out of the blocks to cut rates

This article from the Sydney Morning Herald may be of interest to subscribers. Here is a section:
National Australia Bank has become the first of the big four banks to lower its standard variable rate - but it will not pass on the full Reserve Bank rate cut.

The bank this afternoon said it would cut its standard variable home loan rate from 7.31 per cent to 6.99 per cent, effective on Friday.

The 32 basis-point cut means NAB will hold back 18 basis points from consumers.

NAB will also reduce interest rates on its iSaver online savings accounts by 0.5 percentage points, while credit card rates will be cut by just 0.25 percentage points.

The RBA slashed its main cash rate by a surprisingly aggressive half a percentage point yesterday, to the lowest in more than two years, and said it was necessary to cut by a deeper margin in order to deliver appropriate borrowing rates.

Eoin Treacy's view The Australian stock market has responded positively to a somewhat larger than expected interest rate cut. Whereas the 5% region represented a floor in the past, rates encountered resistance at 4.75% in 2011 and the credit markets appear to be in the process of pricing in an additional decline. Interest rate differentials between Australia and the USA and Europe appear more likely than not to contract further.

The Australian Dollar Trade Weighted Index has been largely rangebound between 130 and 150 for more than a year. It hit a new high in March but has pulled back rather sharply over last six weeks and is now pressuring the lower side of the short-term range. A clear upward dynamic would be required to question potential for some additional lower to lateral ranging.

Among developed nations, Australia was among the most proactive in tightening monetary policy from as early as 2009. The spread between the 10yr and 2yr bond yields (also referred to as the yield curve spread) contracted from almost 200 basis points in 2009 to a low near 25 basis points by October 2010. It found support above that level and has rallied to test the upper side of the 18-month range over the last month. A breakout from this range would confirm a return to a medium-term easing policy.

The banking sector, as referred to in the above article, is attempting to strengthen its balance sheet by failing to pass on the full interest rate cut to consumers. However, perhaps a more important consideration is their ability to profit from a widening of the yield curve spread if the current trend continues. On a relative basis, the Financials sector has been mostly rangebound relative to the S&P/ASX200 since mid-2008 but has been trending upwards from the lower boundary since late last year. In absolute terms, the sector found support above 3400 in August and has held a progression of higher reaction lows since. It broke successfully above 4200 last month and a sustained move below 4100 would be required to question medium-term scope for additional higher to lateral ranging.

With the wider market now also posting new 9-month highs and pushing back up into the overhead trading range, I performed a Chart Library Filter of the S&P/ASX200 in an effort to identify companies making at least new 12-month closing highs. Here is a pdf of the results sorted by new highs then by sector. I performed a similar analysis on March 12th. Ramsay Healthcare and Campbell Brothers appear on both lists.

Among the banking sector, Commonwealth Bank of Australia (8.81% Gross) rallied impressively from its 2009 low to retest the pre-crisis peak but has been ranging with a downward bias since. This week's action is encouraging as it breaks the almost two-year progression of lower rally highs. A sustained move below $47.40 would now be required to question medium-term scope for additional upside. ANZ (8.4% Gross) continues to rally towards the psychological A$25 area which has been an area of resistance for 30 months. It will need to sustain a move above that level to indicate a return to medium-term demand dominance.

At The Chart Seminar in Sydney last year there was a great deal of disagreement about the prospects for Telstra but it is now hitting new 2-year highs and still yields a gross 11.17%. The share has held a progression of higher reaction lows since March 2011 and a sustained move below A$3.20 would be required to question medium-term scope for additional upside.

The funeral services sector has a high degree of commonality internationally. UK listed Dignity is hitting new highs. US listed Service Corp International and Carriage Services are also trending higher. In Australia Invocare is hitting new all-time highs and a break in the progression of higher reaction lows, currently near A$7.50 would be required to begin to question medium-term upside potential.

In the healthcare sector Ramsay Healthcare is a Pan Asia Dividend Aristocrat and hit a new all-time high this week. It will need to hold above A$18 on the next pullback to question medium-term scope for additional upside. Resmed rallied to break a near two-year progression of lower rally highs last week and is improving on that performance this week.

Campbell Brothers is becoming increasingly overextended relative to its 200-day MA and is susceptible to a reversion.

Coca Cola Amatil appears in the March list but has did not hit new 12-month closing highs in the last week so it does not appear on the above list. However the share has been consolidating in the region of the 2010 high for the last month and a sustained move below A$12.25 would be required to check potential for a successful upward break.

In the laggards category David Jones, despite a cut to its dividend, still yields more than 14% and has returned to an interesting level. The share has lost downward momentum as it approaches the 2009 low near A$2 and two failed downside breaks since December suggest a Type-2 bottom (as taught at The Chart Seminar) may be forming. A sustained move above A$3 would confirm this hypothesis. On a commonality basis Myer also appears to in the process of building support.

REITs dominate in the above report and have some of the most compelling chart patterns not least because of the high degree of commonality. IOF Office Fund (4.16%), Westfield Retail (6.07%), Dexus Property Group (5.6%) and Commonwealth Property Office Fund (5.35%) are breaking out of well-defined bases and the benefit of the doubt can be given to the upside provided the breakouts are maintained.

CFS Retail Property Trust (6.77%) has rallied to break the yearlong-progression of lower rally highs. Westfield Group (5.13%) is also rallying from a depressed level.

The above shares show relative strength and a number also exhibit leadership characteristics when compared to the wider market. The potential change of tack on monetary policy should be a tailwind for the market. An improvement in China's performance should also help to bolster demand in the resources sector. (Also see David's piece above) This would suggest that potential for additional upside in the Australian market is relatively well supported.

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