IG Markets - Australian Market Wrap July 19, 2010

IG Markets - Australian Market Wrap

Across Asia, regional markets have started the new week mostly lower following the sharply weaker leads from Wall St. With the Nikkei 225 closed for Marine Day, the Hang is the worst performer, down 1% while the Kospi has drifted 0.4%. On the upside, the Shanghai Composite is bucking the trend, stronger by 1.8%.

In Australia, the ASX 200 finished the session 1.5% lower at 4358.3, off morning lows of 4345. The disappointing consumer sentiment data in the US, as well as worse-than-expected revenue results from Citigroup and Bank of America weighed on the local market. All sectors bar healthcare were firmly in the red, with the industrial, consumer discretionary and financial names leading the way lower.

We saw a very light day’s trade in terms of volume, with school holidays in NSW still continuing and Japan observing National Marine Day. There’s very little confidence around at the moment. The improving confidence and sentiment seen last week has been eroded by the big jump in downside volatility on Friday evening.

There’s too much uncertainty – in the US its corporate earnings and economic data while domestically, it’s the election and nervousness before the upcoming earnings season. Following Friday’s disappointing reports from Bank of America and Citigroup, growth concerns have begun to reemerge. Of 23 companies that have already reported, revenues have only grown by 2.5%. Once again, it looks like corporates are beating bottom line expectations through cost cutting efforts, rather than actual growth, which is clearly very worrying to the market.

The industrials sector was one of the worst performers, losing 2%. Leighton Holdings fell the most, down 3.6% while Boral, Toll Holdings, Downer EDI and Asciano were all weaker between 2% and 3.4%.

Consumer discretionary names also saw significant selling pressure, following US leads sharply lower. The sector gave up 1.9% with the likes of News Corporation, Ten Holdings, West Australian News and Fairfax all down between 2.4% and 3.7%.

Following the disappointing results from Citigroup and Bank of America on Friday night, the financial sector lost 1.7% today, with Macquarie Group (-2.5%) leading the group south. The big four banks were all down between 1.7% and 2.3% while Axa Asia Pacific fell 1.5% after announcing it had given National Australia Bank six more weeks to satisfy the ACCC’s concerns over the $13.3b takeover bill.

Unsurprisingly, material names came under pressure for most of the session. Bluescope Steel was the biggest decliner, down 2.2% while Newcrest Mining and Lihir Gold gave up 1.8% and 1.7% respectively after gold futures fell more than 1% on Friday evening. Elsewhere, diversifieds Rio Tinto and BHP Billiton both finished 1.1% weaker Despite a downgrade from Credit Suisse, Fortescue Metals Group managed to finish the day flat.

In a report from Credit Suisse, it cut Fortescue from outperform to underperform, and lowered its target to $4.50 per share from $6. The broker said weaker spot iron ore prices, higher cash costs and continued evidence of price penalties based on ore quality suggest a rapid downgrade of Fortescue Metals. The broker continued, saying downgraded iron ore prices will mean insufficient free cash in 2011/2012 to fund the expansion of its Chichester and planned Solomon projects, with debt issuance looking expensive because of existing bond agreements.

At the smaller end of the market, Sundance Resources fell 7.7% after coming out of its near month long trading halt. The drop wasn’t too bad in the context of a falling market. It has been suspended from market since its chairman, CEO, company secretary and three other directors were killed in a light plane crash near its major iron ore prospects in Cameroon. Despite the loss of senior management, today’s fall means the stock is only performing 2.3% below the S&P 300/ASX Metals and Mining Index on month, with iron ore miners being particularly weak of late as spot metal prices have softened. In a comment from Shaw Stockbroking, it thought Sundance would have been down more given the weakness in the market. The broker also said the company had been looking for a partner for quite some time, so with this fall, it's in play as a takeover target.

On the upside, the healthcare space was the only sector to finish the day in positive territory. It rose 0.6% thanks to gains of 10% and 1.2% in Healthscope and Sigma Pharmaceutical shares. Healthscope looks to have secured what appears to be a premium price of $6.26 a share from a private equity consortium, comprising Carlyle Group and TPG Capital. The deal values the company at $2.7 billion, well up on the $1.82 billion the consortium was previously offering. However, Healthscope said the value will be reduced by any dividends it pays prior to deal completion. Healthscope said it's been informed the consortium will continue with its existing business plans, which seems to rule out any break-up of the hospitals and pathology businesses.

Ben Potter
Market Strategist
IG Markets

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