BUSINESS

The Aussie traded a familiar recent band during local trade on Tuesday between 1.0115, where the currency is finding some support, and a high around 1.0135. Despite a lack of direction, the Aussie has been buoyed recently on the back of firmer commodity markets and improving economic data coming out of the United States.

By Greg PeelThe Dow gained 71 points or 0.6% while the S&P added 0.4% to 1324 and the Nasdaq rose 0.5%.The People's Bank of China yesterday announced another rate increase, following on from the Christmas Day hike. The PBoC lifted its one year lending rate to 6.06% from 5.81% and this time simultaneously lifted its deposit rate to 3.00% from 2.75%. Inflation is clearly in Beijing's sights. China's latest round of inflation data is due out at the end of this week.Had this hike occurred in 2010, Wall Street would have taken a dive. Last year was a year of panic not just every time a small European nation blew itself up, but every time Beijing threatened, in nervous traders' eyes, to kill the golden goose with monetary tightening. But a new, warm breeze has swept through Wall Street in 2011. Economic data are solid (except for jobs), corporate earnings are healthy, and money grows on trees. QE2 trees.So it was that the reaction to Beijing's move was a small dip at the open that lasted about five minutes. Then it was onward ever upward once more, with Mickey D's leading the charge.Mickey D's (McDonalds, stock code MCD) announced better than expected global like-for-like sales in January and helped send Wall Street to its seventh straight gain. Sales improved everywhere across the planet, including in China, and in Chubby Land Downunder, except for one region – the US. But that's okay. China's been exporting its cheap crap to the US for a decade so now it's “right back at ya”. With a dollar kept in check by the Fed, US exports are finding keen demand.But can the US have too much of a good thing? Mitchell Johnson spent the whole Ashes series warning us that it's best to know when you've had enough. Now that easy monetary policy seems to have served its purpose, and the US economy looks strong, questions are being raised as to whether America should just keep on chugging on those QE2 beers.There was dissent in the ranks of the Fed back in 2010 when QE2 was being considered, but by the time it was implemented the world was already talking about a probable QE3. Last night Richmond Fed president Jeffrey Lacker piped up and suggested that while QE2 should not be halted suddenly, the size and pace of the program should be reconsidered in light of the current situation. It's unlikely Uncle Ben will do any more than listen politely however, given that in his recent “meet the press” he dismissed the notion that QE2 had anything to do with current global inflation. Egyptians may disagree, along with the PBoC.Last night the Fed was in buying US$2.19bn of thirty-year bonds, although most of its purchases are concentrated in the two-ten maturity range. But Fed or no Fed, 2011 has seen a pricking of the supposed US bond bubble as investors have shifted money back into risk assets. And so it was that last night's Treasury auction of US$32bn of three-year notes received a lacklustre response. Foreign central banks bought only 28% compared to the running average of 35%, and the benchmark ten-year yield rose another eight basis points to 3.72%. The Treasury will auction US$24bn of ten-years tonight.A Chinese rate hike by default implies a lower US dollar given the renminbi is pegged in a range and not at a price. But the euro also took a hit last night on a weak German industrial production number for January, but that was put down to the heavy snow. The Aussie also took a hit on the rate hike given Australia's greater sensitivity to the Chinese economy, but as the US dollar index dipped to 77.95, the Aussie ultimately held its ground at US$1.0148.Gold, on the other hand, jumped again on the weaker greenback and on the inflation scare implied by Beijing's policy move. Gold was up US$14.20 to US$1364.00/oz, and silver retook the US$30/oz mark. Oil similarly rose US33c to US$87.80/bbl.Like Wall Street, the LME initially got a scare from the Chinese rate hike but then swiftly recovered, with most metals closing slightly higher on the session. Copper remains above US$10,000/t.The SPI Overnight rose 14 points or 0.3%.With QE2 now causing debate at the Fed, one is reminded that a significant contribution to the GFC came from then Fed chairman Alan Greenspan's policy of dropping the funds rate to 1% in 2004 in the wake of the tech wreck and 9/11. Critics suggest the rate was dropped too low and for too long, and since 2009 now Fed chairman Ben Bernanke has been pushing the “exceptionally low rates for an extend period” mantra of which QE2 is the primary element. Another bubble on the horizon? One presumes that as long as the US unemployment rate remains elevated then QE2 is here to stay. The rest of the world's food and oil inflation woes are not America's concern.Today locally the interim results season steps up a gear with the highlight being Commonwealth Bank ((CBA)). Westpac economists will also inform us just how consumer confidence fared during the January floods. [Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]FN Arena is building the future of financial news reporting at www.fnarena.com . Our daily news reports can be trialed at no cost and with no obligations. Simply sign up and get a feel for what we are trying to achieve.Subscribers and trialists should read our terms and conditions, available on the website.All material published by FN Arena is the copyright of the publisher, unless otherwise stated. Reproduction in whole or in part is not permitted without written permission of the publisher.

By Chris ShawMining, rail and engineering products group Bradken ((BKN)) yesterday reported a below expectations interim profit result of $38.2 million, the number falling about 14% short of the estimate of RBS Australia.According to RBS much of the shortfall can be attributed to increased operating expenditure, while higher than expected interest costs also played a part. Both the Mining Products and Americast operations performed solidly in the period, while a significant positive in the result was the maintenance of full year earnings guidance.Credit Suisse suggests the fact full year guidance has been maintained is indicative of an improvement in underlying business conditions. Supporting this argument, in the broker's view, is the potential for margins to increase in the second half of FY11, as well as the likelihood all divisions of the business, apart from rail, record double-digit revenue growth in the second half.Post the result forecasts across the market have come down, Credit Suisse cutting its earnings estimates by about 3% on average through FY13, while RBS Australia has lowered its estimates by 6-8% across the same period.Deutsche Bank has been more aggressive in cutting its net profit numbers by 16% in FY11 and by 18% in FY12, though the magnitude of the changes reflects the fact the broker was above guidance with its previous estimates. In earnings per share (EPS) terms Deutsche Bank is now forecasting 60c in FY11 and 61c in FY12, which compares to Macquarie at 64.3c and 66.3c respectively and UBS at 68c and 75c. Consensus EPS forecasts according to the FNArena database stand at 61.6c this year and 68c next year.According to UBS, Bradken faces two major headwinds to earnings that are offsetting current strong demand for mining products and consumables out of North America. One is the level of import price competition in the rail division, the second being the upcoming termination of the ESCO licence. The latter will impact on group sales and earnings, but there is some uncertainty in the market at present as to the potential magnitude of this impact.This uncertainty, plus limited earnings growth expectations for FY12, sees Deutsche Bank retain a Hold rating on Bradken. On the broker's numbers the stock is trading on a FY12 earnings multiple of 14.5 times, which simply implies limited value given the growth outlook in its view.Credit Suisse agrees, as despite lifting its price target to $9.90 from $9.35 post the result the broker has downgraded to a Neutral rating. UBS also rates Bradken as Neutral, taking the view the current earnings uncertainty is likely to be enough to limit share price outperformance.But three brokers – RBS Australia, Macquarie and BA Merrill Lynch - continue to rate Bradken as a Buy. For BA-ML there is still value in the stock as its numbers suggest a normalised earnings multiple in FY12 of 12.7 times. BA-ML suggests this makes the stock cheap given the multiple is below the ex-resources average of closer to 15 times.The attraction for Macquarie is Bradken is well managed and has strong market share in its core products. This is a positive given a number of products service the current mining boom and so are experiencing strong demand. This exposure to high growth markets such as the mining sector also underpins RBS Australia's Buy rating, while the broker is also positive on the group's offshore growth strategy over the medium-term.The FNArena database shows a wide range of price targets for Bradken, likely reflecting the current earnings uncertainty surrounding the stock. The consensus price target stands at $9.27, with a range from $8.50 for Deutsche Bank to $9.90 for Credit Suisse.Shares in Bradken today are weaker and as at 1.35pm the stock was down 22c at $8.60. This compares to a range over the past year of $6.18 to $9.60 and implies upside of around 6.6% to the consensus price target in the FNArena database.FN Arena is building the future of financial news reporting at www.fnarena.com . Our daily news reports can be trialed at no cost and with no obligations. Simply sign up and get a feel for what we are trying to achieve.Subscribers and trialists should read our terms and conditions, available on the website.All material published by FN Arena is the copyright of the publisher, unless otherwise stated. Reproduction in whole or in part is not permitted without written permission of the publisher.

By Greg PeelThe Baltic Dry Index is an index of freight rates charged by the owners of the massive bulk carriers which traverse the world's oceans with “dry” cargoes such as coal, iron ore and wheat. The ships include the Panamax, which carries coal from eastern Australia and the larger Capesize, which carries iron ore from Western Australia and Brazil.By end-2010 there were 1813 Panamaxes in operation with a net capacity of around 136mt and 1172 Capesizes with a net capacity of around 211mt.As one might appreciate, ship builders don't just knock up a Capesize in a day or two. The lag in orders for new ships placed by owners and their ultimate delivery means that ship owners need to look into the future to assess the global demand for bulk minerals and grains and subsequent need for transport before they rush into ordering. Similar decisions need to be made as to whether now is a good time to scrap older vessels ready to be replaced by new ones. It is a competitive market which at any time can see an undersupply of vessels when demand is strong and an oversupply when demand is weak. As one might appreciate, the past few years of boom, bust and boom again in commodity demand will have had ship owners and builders pulling their hair out. Freight charges are not fixed – they are fluid and operate much like any spot price market operates. The risk is that weak demand sees freight rates fall below ship operating cost on the one side, or that strong demand pushes freight rates to uneconomical levels for commodity buyers on the other.But what the ship owners' dilemma does mean is that the index of freight rates has in past years become a rather reliable lead indicator of commodities prices. Prices rise only after demand rises, and traders of bulk goods need to book in their ships early to secure transport on orders. This means that typically freight rates rise first as the orders flow in, and then commodity prices begin to rise in recognition of increased demand.Prior to last year, the BDI was running ahead of iron ore and coal contract prices which only step-jumped once a year, so it has proven quite a handy lead indicator of mineral price movements with a long lead time. More recently bulk material contract pricing has moved to quarterly contracts and spot deliveries have increased significantly.The following graph compares commodity prices, in the form of the CRB commodity price index, with the BDI. As one can note from 2006 to 2009, the BDI lead the CRB quite reliably. The relationship is close but not quite as close for the Dow Jones Industrial Average, used here as the proxy for share price movements. But the 30-stock Dow is simply not a good proxy for commodity-based share price movements. The S&P 500 would have been more relevant. And even more so the ASX 200.But while the BDI's lead indicator role works well to end-2009 as the graph shows, it completely breaks down in 2010. This is a disappointment for traders and analysts who have come to rely on the predictive value of the BDI. What's gone wrong?Well for starters, the aforementioned shift in coal and iron ore pricing to at least quarterly contracts, with many more deliveries being made at spot, will have dampened the BDI's predictive power. However, the real reason is that one must look at both sides of the equation – the demand for commodities on one side and the supply of ships on the the other. In short, ship building has run amok, and given construction lag times we can look right back to the 2008 commodity boom as the genesis.The above-mentioned “head count” of Panamaxes and Capesizes represent a twelve month increase of 12% for Panamaxes and 17% for Capesizes. Nor are these vessels generic in capacity, such that not only are there more ships on the water the capacity of the bigger ships has been rising. Thus the increased ship numbers actually translate to only an 11% capacity increase for Panamaxes but a 22% increase for Capesizes, according to data prepared by Barclays Capital.While a number of ships do get scrapped each year, as one can imagine they aren't scrapped five minutes after they're delivered. So an increased ocean fleet will remain an increased ocean fleet for some time.As the above graph shows, the CRB index spent 2009-10 returning to levels of the 2008 boom but while the BDI might have picked the turn, it fizzled and waned for the rest of the year. Once upon a time that suggested commodity prices might also be about to turn but the same trend has continued into 2011. Commodity prices keep rising and freight rates keep plunging.There have been other extenuating circumstances. Late last year South Africa suffered a significant coal supply delay due to a derailment, and then was hit by floods. A tropical storm then hit Western Australian and curbed iron ore exports, before the big one came along in Queensland this year and temporarily shut-down 70% of the state's coal mines. Obviously these events disrupted bulk mineral trade, and hence idle ships led to lower freight rates.Barclays therefore sees some room for the BDI to bounce a bit, but the reality is the current oversupply of ships means the bounce will only be mild even if the CRB rises ever upward. To put things into perspective, nineteen new Capesizes hit the water in the second half of 2010 compared to twelve in the same period in 2009 and six in 2008. And the story gets worse for ship owners.Brazil's world-leading iron ore producer Vale has designed and ordered a new ship – the Chinamax. This 400,000dwt leviathan will transport iron ore to China and blow the paltry Capesizes and Panamax runabouts out of the water. It will be like Lasers taking on Wild Oats XI. And there won't be just one. The first Chinamax is due in mid-2011 but by end-2013, thirty are planned to hit the water.It must be a ship owner's nightmare. But for stock market traders, investors and analysts, it likely means the BDI lead indicator is dead forever. Now we'll just have to figure it out for ourselves. See also "Bleak Prospects For Global Shipping", published on 23rd December, 2010.Technical limitationsIf you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.FN Arena is building the future of financial news reporting at www.fnarena.com . Our daily news reports can be trialed at no cost and with no obligations. Simply sign up and get a feel for what we are trying to achieve.Subscribers and trialists should read our terms and conditions, available on the website.All material published by FN Arena is the copyright of the publisher, unless otherwise stated. Reproduction in whole or in part is not permitted without written permission of the publisher.