IG Markets: Australian Market Wrap

IG Markets Australian Market Wrap

Good afternoon,

In Asia, regional markets are mixed in Friday afternoon trade after US markets gained on the back of strong jobless claims and trade data. Japan’s Nikkei 225 is the biggest gainer, up 1.6% after the nation’s Q2 GDP was revised upwards. Elsewhere, the Kospi is 1% higher while the Hang Seng and Shanghai Composite are both in negative territory.

In Australia, the ASX 200 closed the session 0.5% weaker at 4560, on its lows of the day. Earlier in the day the benchmark index tested but failed to breach the 4600 level, running out of momentum as the materials, energy and financial sectors all turned negative. Healthcare was the worst performer while industrials were the only sector to finish in the black.

The 4600 level is the neckline of a bullish-inverted head and shoulders reversal pattern. There is typically a lot of resistance at these key levels so we’re not surprised by the amount of selling.

Nonetheless, we thought the bullish trade figures out of China might have been enough to see the market push higher Particularly after import data showed a strong turnaround from last month’s weaker-than-expected growth numbers which precipitated Chinese growth concerns and the August selloff.

It also looks like there was a bit of the typical end-of-week profit taking. Heading into the session the local market was up 1.1%. Given it is September, participants are happy to book even the smallest of profits in what is historically one of the weakest months for equities.

The energy sector was the biggest loser, down 1.1% thanks to a fall in crude prices overnight and most of the major names coming under late afternoon selling pressure. Woodside Petroleum and Oil Search were lower by 0.9% and 08% respectively while Santos added to yesterday’s 7% fall, shedding a further 4.7% with the market anticipating a large and dilutive equity raising in the not-too-distant future.

The plunge in Santos’ shares is overdone, says Citigroup, JPMorgan and Macquarie which keep buy, overweight, outperform recommendations respectively on the stock. Santos sold 15% of its Gladstone LNG project to Total for $650 million, which was 20% below Citigroup's expectations. Total also agreed to buy LNG from the project and Petronas agreed to buy more, but terminated its US$500 million milestone payment to Santos. Citigroup believes the JV is likely to sell more LNG and project equity to Korea Gas Corp, leaving Santos with a $2 billion equity raising requirement, partly funded through a hybrid issue. Citi said while its unrisked discounted cash flow has reduced, Santos has made good progress in a tough LNG market and is de-risking the project In a note from Macquarie, it said while its outperform rating "doesn't feel right" given that Gladstone LNG is struggling to get over the line, it's confident it will get there.

Elsewhere, Caltex was a notable winner in the sector, adding 3.5% after saying it expected cost cutting and organic growth opportunities to boost profits significantly in the future.

The materials sector ended the day 0.7% lower having seen minor gains earlier in the session. The afternoon drift was perhaps a little surprising given the stronger-than-expected import growth numbers out of China which suggested domestic demand in that country was still at very health levels. Among the major names, BHP Billiton and Fortescue Metals closed lower by 0.6% and 2.2% respectively while Rio Tinto managed a gain of 0.5%. Elsewhere in the sector, Orica was higher by 0.9% while Newcrest Mining fell 2.3% due to gold’s retreat in overnight trade.

The consumer staples sector also gave up points, losing 0.6% for the session. Foster’s Group, Coca-Cola Amatil, Wesfarmers and Woolworths were all down more than 0.5%.

After starting off in positive territory following strong US leads, the financials sold off throughout the session, finishing 0.2% lower. AMP and QBE Insurance Group were the worst performers, both down 0.8% while three of the big four banks were down between 0.2% and 0.7%. Commonwealth Bank of Australia bucked the trend, adding 0.3%.

Axa rose the most, up 0.4%. In a report from RBS, it believes a renewed bid by AMP for AXA Asia Pacific is "extremely likely" and that while AMP could pay up to $6.40 a share for AXA APH and still make it work, a bid between $6.00-$6.20 a share is more likely. RBS thinks AMP will attempt to drive a hard bargain with AXA APH given NAB are now potentially out of the game. However, the broker said that it is unconvinced a bid of that level would be enough to win over AXA APH directors, with independent survival now looming as a real possibility. RBS believes AXA SA management will be increasingly frustrated at the time taken to secure AXA APH's Asian assets and will reconsider working with AMP. The broker said that given AXA SA's apparent keenness to secure the AXA APH Asian assets, it cannot rule them out also potentially kicking in more money to assist AMP. This could lift the potential price AMP could offer.

Elsewhere in stock specific news, Virgin shares fell 7% today following more bad news this morning. The ACCC said it'll likely block the carrier's planned trans-Tasman tie-up with Air New Zealand. The decision is likely to come as a surprise to many, and it comes just a day after US authorities said they'd move to block Virgin’s planned tie-up with Delta Air Lines on Australia - US routes. Qantas shares are 2% higher as a key competitive threat is seemingly removed.

ENDS

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