IG Markets - Australian Market Wrap Sept. 8, 2010

IG Markets - Australian Market Wrap

Across Asia, regional markets are all tracking US leads lower after renewed concerns about the health of European financial institutions. The Nikkei 225 is the worst performer, down 2.2% as the yen’s advance to a fresh 15-year high hurt exporters and sapped investor confidence. Elsewhere, the Hang Seng, Kospi and Shanghai Composite are all down between 0.5% and 1.4%.

In Australia, the ASX 200 closed 0.8% weaker at 4537.2, just off its lows of the session. Defensive sectors such as telecommunications and consumers staples were the clear outperformers today while the heavyweight financials and materials sectors were the biggest losers, with the potential reality of a new mining tax adding to selling pressures across resource names.

Concerns about the stability of the new government and weak US leads on very light volumes weighed too, reversing some of the positive sentiment established last week.

There seemed to be some confusion among traders as to the outcome for the proposed mining tax. Everyone thought a Labor government meant a certain mining tax. This may not be the case. There could be three potential outcomes – it either goes ahead as planned, it doesn’t get passed or it gets passed with changes.

With Labor not having a majority, it requires the independents to vote in favour of the tax. It’s important to note that the independents only pledged their vote to Labor on confidence and supply votes. When it comes to policy, they have reserved their right to vote as they please.

Fund selling across Asia to make way for China Mobile shares also dragged on the domestic market.

In economic news, Australian housing finance came in stronger than expected in July, rising 1.7% versus the expected 1.0%. The data is further evidence that recent weakness in lending for housing has bottomed out. However, the numbers still show weakness in the construction of dwellings, which was down 0.7%, but finance for the purchase of new dwellings rose 1.5%. There should be little or no impact for RBA policy makers from this report, but strengthens the view that the next move in rates will be higher over the medium term.

Following yesterday’s political announcements, a note from Deutsche Bank said it believes Australia's government is more stable than it looks and there's every chance it could run full term, especially given a mutual dependence by all involved to avoid an election at all costs. The broker believes all those involved in the formation of the minority government have an incentive to ensure the government continues for as long as possible. Elsewhere, in a separate report from Merrill Lynch, it said the re-election of the Labor government after the support of 2 regional independent members of parliament is likely to be a negative for listed healthcare stocks, particularly Sonic Healthcare and Primary Healthcare. This would be due to likely further pathology reform and medical centre competition from planned government super clinics.

Turning to the market, the energy sector was one of the worst performers, closing 1.1% weaker for the session. Caltex slumped 4.2% while Macarthur Coal, Woodside Petroleum, Origin Energy and WorleyParsons were all down between 0.8% and 2%.

The financials were another area of weakness, with the sector declining 1.2%. Axa was the biggest faller, down 3% while the big four banks were all lower between 1.1% and 1.8%. Renewed concerns over the stability of European financials were the main driver.

Consumer discretionary names didn’t escape the weakness, falling 1.1%. Heavyweight News Corp led the group south, losing 3.1% while Ten Network, Qantas, Fairfax and Harvey Norman were all down more than 0.7%.

Material names gave up significant points too The sector was down 0.7%, inline with weaker offshore leads. Bluescope Steel detracted the most points, losing 2.1% while diversifieds BHP and Rio Tinto were down more than 1.2%. Newcrest and Alumina bucked the broader trend, rising 2.2% and 1.7% respectively. Newcrest was buoyed by a resurgent gold price.

Andean Resources finished the session 7.5% lower following news overnight that Eldorado Gold had withdrawn its bid for the company, leaving an accepted C$3.6 billion offer from Goldcorp. Eldorado’s decision dashed hopes among some investors that higher prices would emerge during a bidding war after Andean shares surged on Friday well above prices offered by both parties. Goldcorp's bid at C$650 a share implies a price of $6.80 for Australian shareholders. Eldorado was quite definitive about withdrawing its bid and not entering into a value destroying battle that it said happens all too often in the gold industry. But that doesn't rule out a bid (though this appears unlikely) from another party for what is widely regarded as one of the industry's premier global assets. With M&A activity a current theme of the gold sector, and with gold edging yet higher overnight to just shy of its record, some Andean investors could be switching to other miners.

On the upside, the consumer staples sector bucked the broader trend, adding 0.4% thanks to big jump in Fosters Group. Foster’s rose 4.5% after announcing this morning that it had rejected a $2.3 billion-$2.7 billion cash offer for its wine operations from an unnamed private equity firm, which could spark speculation that interest in the wine arm could flush out bidders for the more valuable beer business or attract further buying interest in the wine division.

Foster's said the indicative proposal significantly undervalued the wine operations. The group bought Southcorp in 2005 for around $3.17 billion and paid around $1.5 billion in 2000 for the Beringer wine business in the US. It has been forced to take around $3.47 billion in write downs and goodwill impairments against its wine business since 2004. This isn't the first time the group has come in focus for private equity groups, with former CEO Trevor O'Hoy confirming in 2007 that it had received some approaches. In a comment from Macquarie, it kept Foster’s at underperform and said the impact of the offer is that it provides us with a third party value of the wine business.

Ben Potter
Market Strategist
IG Markets

ENDS

Discover more about CFD trading with IG Markets, the world’s No.1 CFD provider*.

© Scoop Media