IG Markets - Australian Market Wrap Sept. 22, 2010

IG Markets - Australian Market Wrap

Across Asia, regional markets are mixed in quiet trade this Wednesday as traders digested the latest FOMC statement released overnight. Volumes are light due to holidays in China, South Korea and Taiwan. The Hang Seng is the best performer, up 0.8% while in Japan the Nikkei 225 is 0.3% firmer on the session after Prime Minister Kan said Japan stands ready to intervene again in foreign exchange markets.

Locally, the ASX 200 finished 0.2% stronger at 4625.2, off session highs of 4641.2. The market dipped during morning trade but put in a bit of an afternoon rally, with financial, material and energy names all edging higher. We saw some outperformance from the domestic market today. We were probably oversold yesterday versus US gains of 1.5% on Monday night so it looks like we played a little bit of catch-up.

Given the recent rally in global stocks, there’s certainly some room for profit taking. A lot of people would be happier buying on a pullback rather than chasing the market higher. Having said that, the FOMC statement overnight hinted at the possibility of further quantitative easing which would be bullish for equities.

Its one thing to call for a pullback, but whether or not you actually get one is an entirely different story. The ASX 200 has consolidated nicely above the 4600 break out level over the last five days. The peak to trough move over this period has only seen a pullback of 1.4%, indicating a lack of selling and strong buying support around the 4600 figure. Also, the fact that we’re seeing late-day buying is another bullish sign.

There’s a lot of cash on the sidelines. If markets globally continue to move higher, we’re likely to see significant amounts of money chasing them on ‘fears of missing out’, both on the end-of-year rally and possible performance fees.

In economic news, noted RBA watcher, Terry McCrann, wrote in today's Daily Telegraph that absent a left-field shock, a rate hike next month is "now all but certain". He said potentially more painful for home owners, will be a possible 10-15bp hike on top of that by commercial banks, which would raise the ire of new minority Labor government. Treasurer Swan has already pre-emptively jawboned banks against any moves outside of official RBA hikes. Growing certainty of a RBA hike could cause commercial banks to hold off. However, McCrann believes if there's no official rise until February (as a shrinking number of commentators believe), banks will probably put rates up independently in the next few weeks. Meanwhile, TD Securities senior strategist, Annette Beacher, notes the unexpectedly hawkish tone of RBA this week has finally prompted the interest rate swap market to price in a more realistic risk of the RBA tightening by year end.

The typically defensive healthcare and consumer staples sectors were the best performers today, rising % and % respectively. CSL added the most points in the healthcare space, rising % while Wesfarmers, Woolworths and Foster's Group were all up more than %.

The energy sector had a good session, advancing % despite a pullback of 1.4% in Crude Oil futures overnight. Origin Energy, Oil Search, Woodside Petroleum and Whitehaven Coal were all firmer between % and %.

Financials bucked overseas leads to outperform, adding % after opening the session significantly lower. Axa was the top gainer, rising % while three of the big four banks were stronger between % and %. Commonwealth Bank of Australia bucked the trend, declining %.
In an interesting report from Southern Cross Equities, it believes that Australian banks are poised for lift off. Southern Cross said it's just the currency; there's clearly capital flowing into Australia and equities need to catch up to the Australian dollar. The broker reckons that anyone who thinks the market is range bound or capped at 4650 is completely wrong; it has broken into a new range of 4600 to 5000 and short covering has started on the banks because they (offshore hedge funds) are getting killed on the Aussie dollar. The broker thinks the much greater risk to the market is to the upside, with NAB and Westpac likely to lead the banks rally higher as they remain the two most shorted banks.

The materials sector recovered from early losses to finish the session unchanged. Fortescue Metals Group was the standout, rising 1.9% while diversified miner BHP Billiton managed gains of 0.5%. On the downside, Alumina, Bluescope Steel and Newcrest Mining were all down more than 0.6%. Rio Tinto was 0.4% weaker.

In a note from RBS, it said Rio wants to control the Oyu Tolgoi copper project in Mongolia and could get there by lifting its stake in Ivanhoe. The broker notes that Rio has requested arbitration over the Ivanhoe shareholder rights plan. The arbitration is designed to stop the mining giant gaining control of the company. RBS said it remains unclear how that action will play out. It continued to say that while Ivanhoe will be looking to maximize value for shareholders, it believes Ivanhoe would be a willing seller at the right price.

On the down, the telecommunications sector was the worst performer, closing 2% lower after Telstra closed at a record low of $2.66, down 2.2%. Traders suggested it is being used as a funding vehicle for bets on stocks that offer more attractive upside and yields in the short to medium term. In a comment from Southern Cross Equities, it said everyone's just given up on Telstra. The broker said it’s a stock with a 10% yield that's going nowhere; people are watching the Aussie dollar and obviously there are other stocks that will do better (than Telstra) under a rising AUD. Southern Cross believes money is being rotated to the banks because they have more chance of capital growth and yield, whereas the chances of capital growth in Telstra are pretty low in the short term.

Elsewhere, in stock specific news David Jones fell 1.9% despite delivering a FY profit bang in line with expectations. 9.1% growth in net earnings to $170.8 million was at the mid-point of the retailer's guidance of 8%-10% growth and matched market estimates of $171.1 million. As expected, David Jones reiterated guidance of 5%-10% profit growth in the current financial year and next financial year. However, it added "that to achieve the upper end of this guidance the economic recovery needs to be in full swing, something which (consultant) Access Economics does not expect until FY12". The company revealed that margins have improved despite intense discounting with gross profit margin up to 39.7% from 39.6%, and forecasted margins of between 39.5%-40.0% for this year and the next. In a comment from Citigroup, it said that despite additional discounting, David Jones has protected its margins through support from suppliers.

Ben Potter
Market Strategist
IG Markets

ENDS

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