IG Markets Australian Market Wrap

IG Markets Australian Market Wrap

Good afternoon,

Across Asia, regional markets are all higher as they head towards the weekend. Returning from a public holiday, Japan’s Nikkei 225 had been down more than 1.3% but has rallied all the way back into positive territory on speculation the BOJ had once again intervened in the currency markets. Elsewhere the Hang Seng is higher by 0.3% while the Kospi is seeing gains of 0.5%. The Shanghai Composite is closed.

In Australia, the ASX 200 finished 0.7% weaker at 4601.9, slightly off its session lows of 4585. Losses for the day were broad based with all sectors bar healthcare in negative territory. However, selling was most notable in the materials, financials, utilities and information technology sectors.

It was a fairly lackluster session until rumours hit the market mid afternoon that the Bank of Japan had again intervened in the foreign exchange market. This saw the USDJPY and AUDJPY jump higher, as did the Nikkei 225 as exporters received a boost from the weaker yen. The ASX 200 also jumped higher, led by financials as they have a strong correlation with the AUDJPY.

Tonight’s session will be closely watched with the latest reading on Core Durable Goods Orders due for release. Also, traders will be watching to see if the S&P 500 can manage a weekly close above the June highs of 1131. After convincingly breaking out to 1142 on Monday, the last three trading sessions have seen the US index drift lower, with professional money looking to shake out the weak long positions.

The financial sector experienced sustained selling pressure to be one of the biggest drags, closing 1% to the downside. The major trading banks saw losses of between 1% and 1.6% with NAB being the worst performer while Macquarie Group sustained losses of 1%. Axa Asia Pacific was a rare winner in the sector, advancing 1%.

In a broker note from Morgan Stanley, it said that ANZ won't need to undertake a capital raising if it buys a 57% stake in Korea Exchange Bank from Lone Star and Export Import Bank of Korea. This is based on acquisition prices ranging from 0.7 times to 1.5 times price/book value, implying a purchase price of $2.9 billion-$62 billion. Under these scenarios, the broker estimates the acquisition would be between around 9% and 6% accretive to EPS and between 1.4% and 1.0% accretive to ROE. Recent media reports have suggested ANZ could pay around $4.7 billion for the stake. MS said that while it has concerns about the attributes of the Korean banking market and believes there are significant risks associated with the acquisition of a stake in KEB, it thinks the stock price could be supported by potential EPS and ROE accretion.

The materials sector was also a major weight, ending the session 0.7% weaker and failing to capitalise on generally firmer overnight base metal prices. Heavyweights BHP Billiton and Rio Tinto ended lower by 0.5% and 0.6% respectively while Newcrest Mining, Bluescope Steel and Alumina were all weaker between 1.4% and 2.5%. Fortescue Metals managed to buck the largely negative trend across the resources spectrum rising 1%.

The energy sector was one of the better relative performers, only losing 0.4%. Macarthur Coal and Santos were the biggest gainers, rising 1.4% and 0.9%.

Santos outperformed after a spokesman confirmed Chief Executive David Knox told reporters in Darwin yesterday that its LNG joint venture in Queensland is awaiting Korean government approval to sell LNG to state-backed Korea Gas Corp. Knox, however, also stressed there's no certainty a deal will be sealed. At first glance, his comments suggest a deal is all but done and only needs a government tick of approval. Investors, though, should note that where Kogas end and the Korean government begin isn't always clear. Aspects of the deal, such as price may potentially be of interest to the government, which owns 60% of Kogas, the world's biggest importer of LNG.

On the downside, Caltex Australia came under pressure, losing 1.4% after a broker downgrade. In a comment from Macquarie, it cut Caltex Australia to neutral and kept its price target at $12.50 versus a valuation of $13.91. Given the growing seasonal and structural headwinds facing Caltex’s refining business, Macquarie believes that at $12, the share price is close to the top of its trading range - hence the downgrade to neutral. That said, the broker remains confident of a medium-term tightening of fundamentals in the refining market, which is likely to support the longer-term outlook.

Elsewhere, in stock specific news Telstra fell another 0.4% after hitting a fresh, all time low. In a report from Commonwealth Bank Institutional Equities, it initiated coverage on Telstra with a sell recommendation and price target of $2.70. The broker said Telstra faces multiple challenges and uncertainties, including accelerating fixed-line PSTN revenue declines, risks to margins arising from its recently announced aggressive share win-back strategy, the safety of the 28 cent dividend, the potential finalisation of the $11 billion NBN deal, the ultimate impact on market share and margins from moving to a NBN-world, and the potential for another federal election to result in the NBN being abolished. CBA believes that given these concerns, investors should look to alternative, less risky high-yielding investment opportunities.

ENDS

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