IG Markets - Australian Market Wrap August 25 2010

IG Markets - Australian Market Wrap

In Asia, regional markets are all lower following the weaker overseas leads, with Japanese stocks remaining under pressure due to a rampant yen. The Nikkei 225 is the worst performer, down 1.7% while the Shanghai Composite and Kospi are both softer by 1.3%, The Hang Seng is only weaker by 0.4%.

In Australia, the ASX 200 closed 1.4% weaker at 4320.1, just off its lows of the day. The market had been quite resilient for most of the morning but rapidly deteriorated in early afternoon trade along with the rest of Asia. Losses for the day were both heavy and broad based with the heavyweight materials, financials, and energy sectors all among the worst performers.

Whilst there’s still a lot of uncertainty regarding the hung parliament, the big driver at work at the moment is the global macro economic backdrop, which seems to be deteriorating. With the US earnings season now largely behind us, the focus is returning to the health of the US economy, which is clearly not benefiting the market given the recent slide in economic data.

There seems to be a growing acknowledgement that President Obama’s policies and stimulus packages have failed to gather traction in the most sensitive areas – we’re still seeing a depressed housing market and stubbornly high unemployment.

The big question on everyone’s minds is ‘what’s next’? There are talks of further stimulus extending the bush tax cuts or possibly even a sizeable cut to payroll tax to induce corporate America to hire.

Once the bulk of trader’s return to their desks after the Labour Day holiday on September 6, we’ll get a much better idea as to the market’s thoughts on the economy.

Despite the gloom, there are a few positives to note. The recent pickup in M&A activity and the excellent quarterly earnings season would normally be a catalyst for markets to move higher. The last and most crucial piece of the puzzle to fall into place is for a stabilisation and pickup in the macro economic backdrop.

The energy sector was the biggest loser today, down 2.4% after Crude Oil futures fell another 1.5% in overnight trade. They’re currently trading at US$71.64 per barrel. WorleyParsons was the worst performer, weaker by 9.2% after reporting a 26% fall in full year net profit to $291.1 million as projects were delayed in volatile markets.

The improved performance in the Canadian oil sands market in the 2H proved weaker than expected last year, with the rising AUD eroding offshore revenue. The result is toward the lower end of the company's January guidance of $280 million - $320 million, and below market expectations of $301 million according to average of four analysts’ forecasts. CEO John Grill said he was disappointed with the level of downturn in some markets, with the US power and downstream hydrocarbon markets the most affected. Looking ahead, Worley said it expects increased earnings in FY11 after volatility declined in most affected operations in the 2H, although the lack of specific earnings guidance is likely to keep investors a little nervous. A comment from Goldman Sachs said the quality of the result was not great with a low tax rate of 23% and a fall in operating cash flow of 50%.

Still among energy names and Macarthur Coal was down 9% following yesterday’s $400 million capital raising. Elsewhere, Woodside Petroleum, Origin Energy and Santos were lower by more than 1.4%.

Financial names had another rough session, losing 1.7% as the big four banks did most of the damage, all down between 1.7% and 2.3%. On a positive note, Suncorp-Metway put in a good performance, rising 2.4% after a strong FY result.

The group's net profit of $780 million was ahead of the $769 million consensus forecast, with the 20 cent final dividend also slightly stronger than some had expected. However, on the other side of the coin, a note from Goldman Sachs said the result was disappointing, although that was suspected by the market. The broker continued, saying that while the general insurance result was pretty close to expectations and life insurance was ahead of expectations, the banking net profit of $44 million was less than consensus forecasts for $72 million. The insurance profit of $605 million and insurance margin of 9.6% also compared with consensus of $600 million and 9.4% respectively.

Elsewhere, the heavily weighted materials sector saw increased selling pressure, finishing 1.3% weaker for the day. BlueScope Steel was hit the hardest, down 5% while the likes of Alumina, Fortescue, Rio Tinto and Orica were all lower by more than 1.9%.

In a comment from Citigroup, it said the proposed benefits from BHP’s US$38.6 billion bid for Potash Corporation of Saskatchewan look shaky. The broker believes Potash is worth much more as a standalone company - using the "bullish" assumption that its 2008 earnings will become typical mid-cycle earnings in the next 10 years, and based on historical PE ratios for both companies. With these ratios, Potash would be worth US$128/share as part of BHP and US$195/share on its own. BHP's offer values the company at US$130/share. The broker also said that the vaunted diversification benefits to BHP are questionable, with both companies' share prices correlated more closely than underlying commodities over past decade.

Ben Potter
Market Strategist
IG Markets

ENDS

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