IG Markets - Australian Market Wrap August 30 2010

IG Markets - Australian Market Wrap

Across Asia, regional markets are all higher in early afternoon trade following the strong overseas leads from the US. They were also helped by the news of an emergency policy meeting at the Bank of Japan, which saw the yen weaken and exporters bounce. The Nikkei 225 is the best performer, up 1.6%, while the Kospi and Hang Seng are 1.5% and 0.6% stronger respectively.

In Australia, the ASX 200 finished the session 1.9% firmer at 4452.7 having earlier touched an intra-day high of 4456. Gains for the day were broad based. Materials, financial, industrials and energy sectors led the way, with risk appetite returning after calming words from Ben Bernanke over the weekend that the Fed stood ready to do whatever was necessary to stabilise the US economy.

Friday’s US session could have been a real turning point in the market. Given the recent trend in underlying economic data, markets and traders were positioned for a worse-than-expected 2Q GDP reading. When the figure came in better-than-expected, short traders were forced to cover their position, hence driving prices strongly higher.

If that wasn’t enough, comments later in the day from Federal Reserve Chairman Ben Bernanke further buoyed sentiment and confidence. Participants saw Bernanke’s reassurances that the Fed was ready to do whatever was necessary to stabilise the economy as a backstop to further deterioration in data.

Sometimes, all markets need are some reassuring words and Bernanke’s seem to have done just that. Price action following the announcement has been very positive, which is encouraging for further gains.

In economic news, Australian company profits rose 18.9% seasonally-adjusted in 2Q vs 1Q, almost tripling an expected gain of 6.7%. The data tells a story of strength among the country's corporates, which lends weight to the view that the economy grew relatively solidly through the three months to June 30; mining companies were the main driver of the result. However, inventories fell 0.5% seasonally-adjusted in 2Q vs 1Q, against an expected decline of 0.4%. The result could cause some estimates of 2Q GDP to be revised down. Inventories may be lower as distressed retailers ease back stock levels as consumers remain cautious.

In an interesting comment from Macquarie Group, it said despite consensus downgrades this reporting season, the Australian markets FY11 EPS growth forecast (ex-resources) of 12.4% is at risk of further downgrades in the absence of a pickup in the "non resource" economy. The broker believes that in a year when Australia's private sector GDP growth is likely to have exceeded 5% (nominal), EPS growth is coming in barely positive. The broker also noted that the June half-year 2010 did see EPS growth accelerate to a useful +10.5% vs the previous corresponding period (non resources), although very low top-line growth (of less than 2%) suggests there is significant risk to FY11 EPS growth forecasts. Macquarie flagged the resources sector as the standout in the June half-year reporting season, with 9.1% revenue growth and cost control delivering a strong uptick in EBITDA margins and EPS growth of about 50%.

Turning our attention to the market and there was broad based gains today for the first time in a while. Financial names were the best performers, with the sector adding 2.2%. Macqaurie Group was the biggest riser, gaining 3.7% while the big four banks were all up between 2.2% & 2.7%, with CBA the best performer.

In a comment from Deutsche Bank, it said while recent 3Q updates from Aussie banks showed some headwinds, they also highlighted some positive trends which in its view will lead to improved growth in underlying revenue in FY11 and FY12. The broker pointed to a number of trends, including stabilising margins, improved revenue in retail and business banking, improved credit quality and strong organic capital generation. Deutsche believes ANZ Bank's update showed the strongest improvement and believes that ANZ will outperform over the next 12 months.

The materials sector had a good session, rising 2.1% after the US basic materials sector led gains on Friday evening. Bluescope Steel, Alumina, Fortescue Metals Group and Lihir Gold topped the leader board, all up between 2.3% and 3.6%. Diversified giants Rio Tinto and BHP added 2.5% and 1.5% respectively.

In a research note from Goldman Sachs, it upgraded Fortescue to buy from hold, with a price target of $6.17 and cited positive FY10 results and presentation. Goldman’s expects cash flow to enable Fortescue to repay accrued interest on Leucadia note and self fund its expansion to 55 mtpa. The broker also added that forecast iron ore prices and production rates should allow the expansion to 95 mtpa to be internally funded.

Elsewhere, the industrials sector had a strong start to the week, rising 1.9% as the likes of Downer EDI, Boral, Toll Holding and Qantas all gained more than 2.1%.

The energy and consumer discretionary sectors posted advances of 1.6% and 1.3% respectively.

Ben Potter
Market Strategist
IG Markets

ENDS

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