IG Markets - Australian Market Wrap Sept. 7, 2010

IG Markets - Australian Market Wrap

Across Asia, regional markets are mostly lower in afternoon trade, with the lack of leads from US markets due to their Labor Day holiday offering traders little in the way of direction. The Nikkei 225 is the worst performer, down 0.8% as exporters continue to come under pressure from the stronger yen. Elsewhere, the Shanghai Composite and Kospi are both 0.3% weaker while the Hang Seng flat for the day

Locally, the ASX 200 finished 0.1% lower at 4573.2, off earlier highs of 4588. Trade was very quiet for most of the session ahead of the RBA and political announcements. Gains among financial names were offset by weakness among material, industrial and more defensive names.

The RBA’s interest rate decision was hardly surprising, with everyone expecting interest rates to remain on hold at 4.5%. However, there’s seems to be a growing opinion that it is only the global macro economic backdrop keeping the RBA sidelined. Should data continue to stabilise globally, it’s unlikely to be too long before rates locally begin to move higher again.

In a comment from Nomura, it believes the RBA minutes signal that another rate is likely before year-end. The broker said the RBA highlighted strength running through business investment, booming terms of trade, as well as inflation being above 3% for a few quarters. Nomura believes the next inflation reading will be very important. If it shows any pressures at all, we’re likely to see another hike this year, the broker said.

In further development, it has been announced that Labor will form a minority government. A Labor victory was largely factored into market prices, so it’s not surprising we haven’t seen much of a reaction. This will remove a lot of uncertainty from the market, although one of the key things going forward will be how Australia’s perception to offshore investors changes.

Some may have expected the miners to take a bit of hit now that a Labor government has been confirmed. They were slightly lower, but the movement was neither ‘here nor there’, probably reflecting the fact that the new mining tax legislation is still at least 12 months away and there’s still plenty of water to pass under the bridge. The global macro economic backdrop is much more important in the short term.

The return of US trade tonight will be important as it typically heralds the return of market volumes after the summer holiday period. It will be crucial to see if the market can build on last week’s momentum or will historical September weakness re-emerge.

Turning to the market and the healthcare sector was one of the major detractors today, closing 0.7% lower following falls of 1.1% and 1.2% in shares of Sonic Healthcare and Ansell. Heavyweight CSL was also down 0.8%.

The industrials were weaker too, down 0.3% for the session. Macquarie Airports, Transurban, United Group and Brambles were all lower between 0.5% and 1.3%.

The materials sector also finished in the red, down 0.4%. Rio Tinto was the biggest decliner, losing 0.9% while Newcrest Mining and Alumina both gave up 0.6%. BHP Billiton was 0.3% softer while iron ore miner Fortescue Metals Group declined 0.2%.

On the upside, gains among financial names helped offset the above weakness. The sector added 0.3%, with insurers QBE Insurance Group, Insurance Australia Group and Suncorp – Metway leading the group higher, all up between 1.4% and 3.6%.

In a note from RBS, it said the impact on insurers from Saturday's earthquake in New Zealand is not as bad as first expected. RBS believes that while the NZ earthquake initially shaped as a large catastrophe event, particularly for Suncorp - Metway, things do not now look as bad. The broker notes the earthquake exposure can easily be absorbed by Suncorp's FY11 natural hazard allowance of $460 million. Elsewhere, RBS said the only negative for IAG is that its maximum event retention increases to $175 million this calendar year. For QBE, the impact of these events will not be significant at the group level due to its larger size and the fact it generates only 26% of earnings from Australia/NZ.

Elsewhere, the big four banks were all stronger between 0.4% and 1.1% while Macquarie Bank continued to see selling pressure, declining 2.2%.

In a comment from Deutsche Bank, it cut Macquarie Group’s target price to $49.00/share from $56.50, but kept its buy rating and said the share price might struggle near-term with weak equity markets depressing sentiment toward the stock. Deutsche believes that whilst there may be some further downside to earnings should market activity in key divisions not recover to more normal levels, it thinks there is long-term valuation support for the stock at the current price, particularly given the long-term growth opportunities presented by its offshore expansion strategy. Nonetheless, the broker sees further slowdowns in equity markets and advisory businesses, and radical regulatory change as the key downside risks.

Ben Potter
Market Strategist
IG Markets

ENDS

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