IG Markets - Australian Market Wrap July 20, 2010

IG Markets - Australian Market Wrap

In Asia, regional markets are mostly higher this Tuesday, taking their leads from gains on Wall St. However, the Nikkei 225 is lower, down 1.2% with technology names under pressure following the disappointing revenue numbers from Texas Instruments and IBM. The Shanghai Composite is the top performer, up 1.8% while the Hang Seng and Kospi are up 1.4% and 0.3% respectively.

Locally, the ASX 200 finished 1% firmer at 4403.6, well off its morning lows of 4361.1. Around midday, the market began to rally, with gains among materials and financial names leading the index north. The move coincided with a significant push higher in the AUDUSD, as well as other regional markets.

It seems a comment or two regarding Chinese growth prospects ignited today’s rally, with a Chinese spokeman saying domestic consumption will continue to grow at a relatively fast pace in the second half of the year.

Nonetheless, tonight’s going to be a big test for global markets. The strong Asian momentum should certainly help sentiment heading into a jam packed pre-market earnings session featuring the likes of Pepsi, Bank of New York Mellon, Johnson & Johnson and Goldman Sachs.

In economic news, the RBA signalled interest rates could be on hold for a few months more if 2Q inflation data on July 28 doesn't materially change its current outlook for prices growth. In minutes of its July 6 policy meeting, published today, the RBA said previous aggressive hikes had given it scope to keep policy steady during the month at a time when international uncertainty had grown. Comments tend to suggest the RBA is cautious about the global environment and is looking to news, such as European bank stress tests, to guide its decision-making. In a comment from Commonwealth Bank, it said the central bank is expecting a moderation in underlying 2Q Aussie inflation. However, the broker believes that if that doesn't happen, expect a rate hike on August 3.

The best performing sector today was the materials space, rising 1.6% despite weaker base metal leads from the London Metals Exchange. Alumina was the top performer, up 31% while the likes of Fortescue Metals, Rio Tinto, BHP and Amcor all gained between 1.5% and 2.3%.

Among the smaller miners, OZ Minerals added 2.2% after it was upgraded to buy in a report from Deutsche Bank. The broker said it is awaiting a "step changing event to potentially impact valuation" when OZ deploys its cash pile, which currently represents a third of its valuation estimate. Deutsche sees acquisition, exploration success or a capital return as the most likely event. The broker also said production at Prominent Hill continues to impress, and the reserve increase at Sandfire Resources' DeGrussa project suggests it is now in OZ Mineral’s zone, following the 19% stake in a smaller copper/gold miner taken out by OZ earlier this month.

The consumer discretionary sector had a strong day, rising 1.6%, following the positive lead from US consumer discretionary names. Crown was the biggest advancer, rising 3.7% while Ten Network, Harvey Norman, Tabcorp and Tattersalls were all firmer between 2.2% and 3.2%.

In a note from Credit Suisse, it raised Crown to outperform from neutral, saying it is "getting ready for Gorgon" with its Burswood casino expansion project. Crown is spending $350 million over the next three years to add tables and slots to Burswood, its casino outside of Perth. Credit Suisse believes the added capacity will be met with "adequate demand" given the Gorgon gas project will employ 6,000 people in 2012-2013, its peak construction year. The broker upgraded the casino operator’s price target to $9.75 from $8.70. Credit Suisse believes that over the next 12 months as the market gains confidence in the earnings accretion from the expansions, Crown’s share price will rise.

Elsewhere, industrial and financial names were well supported for the session. Among industrial stocks, Qantas added 4.9% while James Hardies and Macquarie Airports were 1.6% and 2.1% stronger respectively. Axa led the financials higher, up 1.9% while the big four banks were all up between 0.7% and 1.5%.

In stock specific news, energy players Riverdale Mining (1.7%) and Aquila Resources (flat) were both upgraded today. In a note from UBS, it upgraded Riversdale Mining after a $337 million capital raising to help fast-track the development of its Benga coal mine in Mozambique. UBS believes Riversdale is in a prime position in Mozambique, an emerging source of coking coal, and notes its potential as an acquisition target. The broker reckons Riversdale's coking coal exposure, sizable resource base and large tenement position in an emerging coking coal region makes it attractive to potential corporate acquirers.

Separately, Aquila was upgraded to neutral in a broker report from Macquarie. The broker said that the completed feasibility study on the Washpool coking coal project showed capex coming in at $320 million vs its $400 million forecast. However, the benefit is offset by higher production costs of $106/ton vs Macquarie's $100/ton estimate. Macquarie believes that Aquila is now moving into value territory. However, given the scale and timing of its project pipeline, the broker believes that execution, funding and infrastructure access risks are material.

Ben Potter
Market Strategist
IG Markets

ENDS

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