IG Markets - Australian Market Wrap Sept. 1, 2010

IG Markets - Australian Market Wrap

Across Asia, regional markets have shrugged off the flat US leads to be higher in early afternoon trade, with Japanese exporters benefitting for a weaker yen and stronger-than-expected Chinese PMI data boosting overall sentiment. The Nikkei 225 and Kospi are the top performers, up 1.2% and 1.3% respectively. The Hang Seng is 0.4% firmer while Shanghai is bucking the trend, down nearly 1%.

In Australia, the ASX 200 closed 2.1% firmer at 4495.7, just off its highs of 4450.1. Gains for the day were broad based and were led by the materials and financial sectors, which both surged by more than 2%. While the market opened stronger, gains accelerated after better than expected Chinese PMI data and Australian GDP numbers, which boosted not only equities but also the AUD.

The local market outperformed strongly today, with the better-than-economic figures really fuelling gains. With financials and materials the best performers overnight, we had expected to see the Australian market outperform leads. However, the economic data was the icing on the cake and broadened the rally.

There’s seems to have been a bit of a positive shift in sentiment this week, with today’s data confirming local resilience and our growing correlation to Asian markets, as opposed to the US. Nonetheless, tonight’s leads will be important, especially considering the ADP private sector jobs report and Manufacturing PMI are due.

In economic news, Australia's economy grew strongly in 2Q, easily beating economists' expectations with growth of 1.2% on-year. This in turn increased the annual pace of expansion to 3.3%. Economists had expected 0.9% on-quarter growth and 2.8% for year. With the upward revision to the 1Q result, Australia is now a picture of economic health. Surging investment, government spending and mining exports underpinned the result which exceeded recent forecasts published by the RBA. This strength could force some rethinking about when the RBA is likely to hike rates again.

In a comment from Nomura, it said it’s not just the mining sector leading to economic growth in Australia, with the latest Australian GDP data showing broad growth. The broker said this was a very strong figure in just about all aspects. Nomura believes the economy is looking less two-speedish by the day; more one speed and that speed is fast, citing rising household consumption and business spending in the quarter. Nomura also added that the numbers imply the RBA may have to put in another rate hike by year end after economists had lowered rate hike expectations in last few weeks on global economic worries.

The materials sector was the standout performer today, adding 2.6% after US peers had a good overnight session. Fortescue topped the gainers, rising 5.1% while Bluescope Steel, Alumina and Orica were all firmer between 3% and 4.2%. Diversifieds Rio and BHP advanced 3.1% and 2.3% respectively while Newcrest Mining rose 1.7%.

In a comment from RBS, it cut Newcrest Mining’s price target to $34.16 from $36.66, and maintained its hold recommendation now that the takeover of Lihir Gold is complete. The broker said profit forecasts are higher on the back of the integration, but dilution associated with the issue of new shares has lowered EPS and net present value calculations. RBS also notes that potential positives from the merger include synergy gains of at least $85 million a year, with potential negatives including a reasonable chance of write downs associated with the acquisition cost.

Financial names had a very good session too, rising 2.2% on the back of the good US lead where regulatory approval for a Chinese investment in Morgan Stanley spurred interest in the sector.

Bendigo & Adelaide Bank topped the list, rising 3.1% after announcing a share buyback. Elsewhere, the big four banks were up between 2% and 2.8%. Macquarie Group managed gains of 0.9%.

The industrial sector managed to shrug off the weak performance from its US counterpart, rallying 2.1%. Downer EDI, Boral, United Group and Leighton Holdings were the biggest advancers, all up between 2.7% and 3.5%, with Downer the best. Leighton this morning announced its Middle Eastern JV Al Habtoor Leighton Group had won the construction contract for a $220 million building project in Dubai.

Elsewhere, in the sector beaten airline Virgin Blue surged, adding 11.6%. It appears investors are backing CEO John Borghetti’s high-risk strategy to lure a greater share of the business market from Qantas, as well its recent network overhaul which culminated in the removal of a number of loss making routes.

Elsewhere, the consumer discretionary and staples sectors had strong session rising % and %. Among discretionary names, Crown and Fairfax Holdings added % and % while Wesfarmers and Woolworths were up more than 1.7%.

Ben Potter
Market Strategist
IG Markets

ENDS

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