IG Markets - Close Of Markets Wrap July 26, 2010

IG Markets - Close Of Markets Wrap

Across Asia, regional markets are higher on the back of positive US leads and growing optimism that Asia's economic recovery is gathering momentum. The Nikkei 225 is the region's best performer, up 0.8%, with the Kospi not far behind with a gain of 0.6%. The Shanghai composite overcame early weakness and is currently up 0.2%.

In Australia, the ASX 200 closed up 0.6% higher at 4486, well off its earlier highs of 4503. While gains for the day were broad based with the heavyweight materials, financial, industrial and energy sectors all higher, they were all well off their earlier highs and showing signs of losing steam.

While on face value, price action in the US on Friday suggests the market was happy with the stress test results, there definitely seems to be a growing chorus of discontentment about the rigour of these assessments. While the market is showing inevitable relief that nothing sinister is "lurking in the closet", the measly EURO3.5b European regulators are claiming the "failed" banks require is a missed opportunity to fortify the banking system.

Locally, the best performer of the morning has been the consumer staples sector which closed up 1.1% higher, predominantly due to a better-than-expected Q4 sales update from Wesfarmers. The retail giant's shares finished more than 3.2% higher after Coles reported both total food & liquor and comparable fourth-quarter sales up 4.2% compared with Woolworth's fourth-quarter Australia food and liquor growth of 3.4%. JPMorgan was expecting Coles to report 3.1% like-for-like sales growth, excluding petrol. Wesfarmers management failed to give much guidance but said the group is "well positioned" for the 2011 financial year.

The material sector also helped drive today's gains advancing 0.7%. Strong performances across the base metals complex on Friday night and broadly improving risk appetite flowed through to buying interest for our major resource stocks. Among the heavyweight names, BHP and Rio Tinto were both firmer by approximately 0.4%, while Fortescue Metals surged by more than 3.8%. Elsewhere in the sector, gold miners Newcrest Mining and Lihir Gold closed both in positive territory despite the price of gold slipping back below US$1190/oz.

Still on Newcrest, UBS raised its target price on the producer to $41.00 from $36.30,"on the back of gold price upgrades and the recent underperformance of NCM relative to the global gold stocks". The broker also sees Newcrest's valuation trailing its North American peers by 10% since the takeover deal of Lihir Gold was announced and expects a re-rating with the deal now more likely to go through.

The financial sector also enjoyed a 0.6% rise on the day. All four of the big banks closed in positive territory by more than 0.5%. The clear drag on the sector was QBE which closed 5.6% lower after the insurer announced it expected profits to be down some 40% from the pcp on weaker-than-expected insurance margins. Given this price action expect downgrades from the analyst community.

Across the energy space, renewed optimism over the prospects for the global economy saw most of the major energy names being bid higher. Notable movers included Woodside Petroleum and Macarthur Coal which were firmer by 0.5% and 3.3% respectively.

In economic news, quarterly PPI (producer price index) numbers came in at 0.3%, much softer than the 0.8% the market had expected, suggesting that inflation is well contained at the wholesale level.

The AUD had a minor reaction initially falling about 25 pips to c.0.8950.

It seems the initial optimism generated from the stress test results and another healthy session of US corporate earnings is giving way to that cautious mindset that has characterised the last few months. The market's testing and then retraction from the 4500 level suggests that the wave of money behind this morning's assault may not yet be strong enough or have the weight of numbers behind it to see us push beyond this level, at least until it is clearer as to whether more monetary policy tightening is on the way.

Too aggressive a line, or a too perceived eagerness by the RBA to hike rates again could see consumer confidence, and by effect, consumer spending, unravel very quickly. The market knows this and is certainly trading that way.

Kind regards,
Chris Weston
Institutional Dealing
IG Markets

ENDS

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