IG Markets Australian Market Wrap

IG Markets Australian Market Wrap

Good afternoon,

Across Asia, equity markets are all significantly higher following the very bullish set of leads from the US overnight, driven by the plan to inject a further US$600 billion in the struggling US economy. Japan’s Nikkei 225 is the strongest performer, up 3.2% thanks to big gains among exporters and resource stocks. Elsewhere, the Hang Seng, Kospi and Shanghai Composite are all up between 0.4% and 1.3%.

In Australia, the ASX 200 closed 1.2% firmer at 4800.6, slightly off earlier highs of 4815. Gains for the day were broad based, with the materials and energy sectors adding the bulk of the points. The financials, utilities and telecoms sectors all closed modestly lower.

Markets globally are certainly in a bullish mood. We had thought we may see some sort of ‘buy the rumour, sell the fact’ situation play out after the Federal Reserve announced their plans for further stimulus. However, this seems to have been completely wrong. Rather, it’s been a ‘buy the fact’ scenario as the US dollar continues to be sold off heavily, supporting ‘risk’ trades globally.

The materials and energy sectors were the main drivers as the underlying, USD-denominated commodities were boosted by the weakness in the greenback. It looks like markets really want to move higher. It appears to be the path of least resistance and there is a good chance we could see a strong rally into year-end now.

The trend could really gain momentum as we may see sidelined money forced to chase the market higher. There’s likely to be a fair bit of ‘fear of missing out’ based buying. A lot of traders have been waiting for a pullback to deploy capital. It hasn’t come and now looks like it might be some way off.

Another big catalyst over night was speculation that Obama’s weakened governing position may see his administration open to extending the Bush-era tax cuts to all income brackets. This is in turn fuelled talk that the much anticipated end-of-year tax incentivised selling may not occur.

Tonight, the usually highly anticipated non-farm payrolls number has the potential to add even more fuel to the fire if it can come in ahead of expectations for +80,000 private sector jobs. On the other hand, it may be overshadowed by this week’s election and FOMC developments.

The materials sector finished the session as the day’s best performer rising 3.4%. Gains were led by heavyweights BHP Billiton and Rio Tinto which soared 3.6% and 4.8% respectively, while the likes of Newcrest Mining, Fortescue Metals and Alumina all rallied between 1.9% and 4.6% on stronger commodity prices.

The energy sector was another strong performer, rising 2.2% for the session after crude oil continued its recent push higher. WorleyParsons topped the sector, jumping 6.1% while the likes of Caltex, Paladin Energy, Woodside Petroleum and Santos were all higher between 1.8% and 6%.

In a broker report from Morgan Stanley, it upgraded Caltex to overweight and bumped up its price target to $15 from $14. The broker said that in retrospect, 2009 will likely represents the cycle low from global refining and Caltex's earnings. The broker also notes the quality of the company's non-refining income. Morgan Stanley believes the only significant headwind is the AUD strength as this will erode refiner margins, but is potentially more than offset by other factors. The broker also thinks company guidance for FY profit in the 2H could trigger upgrades and a re-rating.

In another interesting research report, Deutsche Bank said China is no bottomless pit for LNG demand, warning Australian investors in LNG plays, like Origin, Woodside and Santos. Deutsche said that while LNG will undoubtedly form part of China's energy mix, it will be a marginal gas source as cheaper ones are available to the powerhouse economy. The broker continued to say, that unlike traditional LNG buyers (Japan, South Korea and Taiwan), China has significant indigenous gas resources, and its geographic location is conducive to imported gas via pipelines from Turkmenistan and soon Russia. Consequently, Deutsche does not see China as the LNG sink of the Pacific Basin, and price will increasingly become a key negotiating factor in Chinese LNG deals. The broker believes 21% China LNG demand compound annual growth rate to 2018 seems a significant opportunity for Australian LNG projects to achieve FID (final investment decision). However, it adds a substantial proportion of the forecast 50 million metric tons/year of LNG demand by 2020 has already been contracted, with Wood Mackenzie estimating as little as 12 million tons/year remains uncontracted.

On the downside, the financial sector had a disappointing session falling 0.1% on speculation that potential regulatory reforms imposed on banks by the government will negatively impact on earnings. After a strong recent run three of the big four banks saw modest losses of between 0.1% and 1%. Westpac finished flat on the day.

Axa bucked the trend, rising 0.5% after it confirmed what most in the market suspected, that AMP is back in talks with its biggest shareholder, AXA SA, about teaming up for another tilt at the group. AMP said the group has "always had dialogue with the French", adding the group still sees the strategic merit of buying AXA APH's Australian and New Zealand arms "if it were on the right terms". Those words could prove a real sticking point in any talks, with the AXA APH board likely to be reluctant to back any deal that values the group at less than National Australia Bank's offer, which valued the firm at $6.43 per share cash. One thing in AMP's favour, though, is unlike NAB, it has already convinced the competition regulator to let the deal through.

ENDS

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