IG Markets Australian Market Wrap up

IG Markets Australian Market Wrap up

Good afternoon,

Across Asia, regional markets have started the new quarter in mixed fashion after better-than-expected US data eased fears of another recession overnight. The Nikkei 225 and Kospi are firmer by 0.4% and 0.2% respectively while the Hang Seng is down 0.1%.

In Australia, the ASX 200 finished 0.1% lower at 4579, having traded as high as 4617 this morning. Advancers included the materials, telecoms and energy sectors while consumer names along with the financials and healthcare sectors detracted points.

The market slid away in afternoon trade, with participants seemingly uninterested in putting any money to work ahead of the weekend, and at the beginning of the month. The market did briefly jump higher following the stronger Chinese manufacturing numbers, but the rally was very short lived.

Whilst September was one of the strongest on record, it seems there’s a bit of apprehension heading into October. October is typically one of the weakest months of the year as well. Coming off the back of such strength, a lot of participants believe we could be in for a much quieter month, especially given the propensity for end-of-year tax loss selling from US mutual funds.

Turning to the market and the financial sector was the big detractor, losing 0.8%. Insurers Suncorp - Metway and Insurance Australia Group topped the decliners, falling 2.6% and 1.9% respectively while the big four banks were all down between 0.5% and 1.4%.

In a strategy report from UBS, it reiterated its underweight stance on the Australian banking sector, saying given the weak outlook for pre-provision profit growth, bank stocks are fully priced at 2 times book value. UBS said yesterday's credit growth data from APRA was soft, with no sign of recovery and noted that August business credit was down 0.6% and housing grew 0.6%. The broker believes the recovery in credit growth remains choppy, with the business recovery still being pushed out, consistent with recent commentary from the major banks; the sharp rebound in deposit growth in recent months eased in August highlighting that it is too early to extrapolate a recovery.

The consumer discretionary and industrial sectors also weighed, declining 0.4% and 0.3% respectively Fairfax Media and Aristocrat Leisure were down more than 1.7% while Downer EDI and Boral were the biggest losers in the industrials space. They lost more than 1.3%. Qantas added 1% after a positive broker note.

JPMorgan bumped up Qantas’ target price to $3.26 from $3.00 and reiterated its overweight rating for the stock. The broker expects the yield recovery and a strong AUD to be key drivers of earnings growth in FY11; it notes that yesterday's traffic figures show that loads were robust again in August, although below the previous corresponding period. JP Morgan upgraded FY11, FY12 EPS forecasts by 9.4% and 16.2% respectively, mostly driven by changes to forex assumptions; JP Morgan sees good valuation support for Qantas at current levels based on historical trading multiples, while potential upside to yields over the medium-term relative to their current forecasts is a further positive.

The definite bright spot of the day was the performance of the materials sector which finished 0.8% higher. Firmer base metal prices and positive economic data out of the US were the catalyst for the gains. Heavyweights BHP Billiton and Rio Tinto closed firmer by 1.4% and 0.4% respectively while Fortescue Metals also advanced 1.2%. Elsewhere in the sector PanAust rose 2.3% while Riversdale Mining and Newcrest Mining enjoyed gains of 1.8% and 0.8% respectively.

In base metals news, lower copper smelter run rates at two major plants will tighten the availability of red metal, and support prices over 4Q10 and into 1Q11, a report from Commonwealth Bank of Australia said. The bank noted that Japan's No.2 copper smelter, Sumitomo Metal Mining, said yesterday it will produce 202,000 metric tons of refined metal for the October-March half year, 10% below capacity, reflecting low treatment, refining charges and shortages of copper concentrate. Meanwhile, Pan Pacific Copper, Japan's largest smelter, plans to run 13% below capacity over the same period.

The energy sector also posted gains of 0.6% with overnight crude prices soaring 2.8% to be just south of US$80/b. Woodside Petroleum, Oil Search and Whitehaven Coal all saw gains of between 1% and 1.6% while selling pressure hit Origin Energy, Caltex and Santos which all fell between 0.1% and 0.8%.

ENDS

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