Strong US finish may push Asian markets higher

Asian markets are expected to open higher this morning thanks to strong offshore leads.

US stocks posted their largest rally in a month as reporting season starts to ramp up. This week will be dominated by US corporate news.

The Dow Jones added 1.5%, the S&P500 up 1.6% and the Nasdaq 1.8% higher. Coca Cola is usually a good bellwether for the US economy and global growth, through its network of international bottlers. Its shares firmed 2.1% on the back of better than expected earnings numbers.

In Asia, corporate earnings will be dominated by BHP Billiton, which released its quarterly production numbers this morning.

BHP’s quarterly production report is broadly in line with market expectations. Market expectations are for profit of around US$9.5bn in the second half of the year. Production numbers for the third quarter show good growth on the same period last year, but they are down on second quarter numbers. Iron ore is the highest on the priority list, given earnings composition.

Production volumes were up 14% on the same period last year but down 8% compared to the second quarter. As long as the iron ore price stays near current spot levels, there won’t be too much market angst around the numbers.

Both BHP and Rio Tinto have shown an ability to offset lower iron ore prices with rising production and this needs to continue. Weather has a part to play in explaining some of the falls compared to the second quarter.

With iron ore numbers in check, the next focus is on the petroleum division and natural gas in particular. The recent fall in US natural gas prices is no surprise and has seen a large negative sentiment shift towards BHP.

Natural gas production for the third quarter looks high compared to the prior corresponding period but it’s worth noting this is distorted by two very large acquisitions last year. When compared to the second quarter, production was actually down 3%. That combined with lower prices will provide downward pressure on earnings when they are released later this year.

The turnaround in copper production from the Escondida mine and grade improvement is welcoming. Other than that, the quarterly production report is largely in-line across all other divisions.

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