IG Markets Afternoon Wrap Up

IG Markets Afternoon Wrap Up

Good afternoon,

Across Asia, regional markets mixed following the relatively flat session on Wall Street. The Shanghai Composite, which resumed activity following a seven-day break, was playing catch-up, currently stronger by 3.4% to be the best performer. Elsewhere, The Hang Seng is up 0.8% while the Nikkei 225 and Kospi are 0.5% and 0.3% softer respectively.

In Australia, the ASX 200 finished the session 0.2% weaker at 4681, well off its earlier lows of 4666. The market was fairly defensively positioned for much of the session with the telecoms and property trust sectors among the best performers. The market’s comeback from earlier lows was driven by the materials sector paring earlier falls.

We saw relatively subdued trade across the Australian market today. Positive comments from Moody’s regarding China’s economic resilience, as well as suggesting a possible upgrade to its sovereign credit rating has helped the market reverse earlier losses. But the bigger picture continues to be dominated by caution and profit taking ahead of tonight’s key nonfarm payrolls release.

Tonight’s release has bigger implications than usual. It should help settle any conjecture over both the necessity and size of any expanded quantitative easing (QE) program. On one hand, a weaker figure will almost certainly mean more QE while a stronger read could see these expectations decline significantly. Either way, we view it as a win-win situation for equities.

In terms of foreign exchange, the Australian dollars tilt at parity may well rest with tonight’s data release. If tonight’s figure is weaker-than-expected, as many investors are anticipating, this could lead to a more sizable QE program being priced into the currency market. Undoubtedly, this would be USD negative and hence AUD positive. Having retreated to 0.9830, the above scenario could very well see the AUD surpass last night’s post-floating record high of 0.9918.

On the downside, the consumer discretionary sector was one of the biggest detractors, losing 0.7%. Retailers JB HiFi and Harvey Norman led the way south, falling 3.9% and 3.6% respectively after JB was downgraded to underperform from neutral by Credit Suisse. Elsewhere, Tattersalls, Tabcorp, Myers and David Jones were all down more than %0.8.

The financial sector also saw significant weakness, declining 0.4%. Macquarie Group was the worst performer, losing 2% while the big four banks were all down between 0.2% and 0.8%. Insurers Suncorp-Metway and Insurance Australia Group bucked the broader trend, adding 0.5% and 0.3% respectively.

In a comment from Deutsche Bank, it said the strong Aussie dollar, which hit a post-float high of US$0.9918 overnight, will only have a relatively minor impact on Australia's major banks, despite their significant offshore exposure. The broker said currency hedging will help those that hedge a little, noting Commonwealth Bank has fully hedged its FY11 NZ profit while Westpac hedge up to 18 months in advance; ANZ has fully hedged its 2H10 earnings but is only partially hedged for FY11. Deutsche said NAB and Macquarie do not have currency hedges in place leaving the impact likely to be worse for these banks; the broker reckons Macquarie is the most impacted from the strong AUD.

The energy sector took a breather today falling 0.2% thanks in large part to a 2.2% overnight decline in the price of crude oil. Among the sector leaders, Woodside Petroleum and Caltex fell by 0.5% and 0.2% respectively while Macarthur Coal, Origin Energy and Santos all enjoyed gains of between 0.5% and 1.2%.

After a day of oscillating between modest losses and fractional gains the materials sector managed to finish the session unchanged. During the Asian session commodity prices pared some of their overnight losses, reversing the declines seen across the sector in morning trade. Heavyweights BHP Billiton and Rio Tinto closed 0.1% firmer and flat respectively while Fortescue surged more than 4.5% on a technical breakout. Elsewhere in the sector Amcor, Newcrest Mining and Bluescope Steel closed lower between 0.8% and 1.3%.

ENDS

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