IG Markets - Australian Market Wrap Sept. 9, 2010

IG Markets - Australian Market Wrap

Across Asia, regional markets are mixed in early afternoon trade despite positive overnight leads. Successful bond auctions in Poland and Portugal helped ease concerns over Europe’s debt problems. The Nikkei 225, Hang Seng and Kospi are all firmer, up between 0.3% and 0.8%. Elsewhere, the Shanghai Composite is bucking the trend, down 1.1%.

In Australia, the ASX 200 closed the session 1%higher at 4582.2, off a morning peak of 4593. Gains accelerated mid-morning when the latest employment report showed stronger-than-expected job creation and a bigger fall in the unemployment rate. Across the sectors, the financial, consumer discretionary, industrials and materials added the bulk of the points.

After a positive open this morning, the local market really got a move along following the employment numbers. It shows the demand for labour is continuing to firm, with the economy basically at full employment. This has certainly put a rate hike before year-end right back on the agenda. The only issues now will be the timing and magnitude.

This strong domestic data, coupled with the easing of concerns in Europe has seen traders’ risk appetites increase, which bodes well for commodities based markets like Australia. Interestingly, we’ve seen a bit of a pickup in the mid-cap mining sector recently, which is characteristic of increased risk appetite.

From a technical perspective, the ASX 200 looks to be close to confirming a bullish inverted head & shoulders pattern. We need to see a decisive close above the 4590 level before the pattern is completed. Should this occur, upside targets would point towards the 5000 level.

In economic news, the Australian job market just keeps on giving with a further 30,900 jobs created in August, slightly above expectations of 25,000 and underpinned by a massive 53,100 rise in full-time employment. The unemployment rate fell to 51% from 5.3%, highlighting growing pressures in the labour market as the economy accelerates. Overall, the report will alert the RBA to a potential intensification of job market pressures, making it nervous and potentially trigger happy after the release of 3Q inflation data at the end of October.

In a comment from St. George Bank, it said any chance of a rate cut from the RBA in the coming months may have been permanently killed after the better-than-expected jobs report. The broker said it's a pretty hearty result and it's going to give the market a lot more confidence about predicting a rate rise in November St. George also noted the report was particularly strong in that it reversed last month's trend of sliding full-time positions with a big gain in full-time slots, showing employers are a lot more confident.

Across the sectors, the financial space the top performer, closing 1.4% higher. NAB was the biggest advancer, surging 3.8% as investors were relieved that the bank could walk away from the Axa deal and therefore not need to undertake a dilutive equity raising to fund the acquisition.

Axa slumped 6.6% after the ACCC continued its opposition to NAB's $6.43/share bid. The opposition suggests the market thinks NAB's pursuit may be facing insurmountable hurdles, or at least hurdles not worth trying to jump over, as the ACCC didn't consider undertakings to divest North platform to IOOF sufficient to overcome its concerns. Spurned suitor AMP said AXA APH remains an attractive strategic target at the right price, but the big question is whether it can woo both AXA APH independent directors and AXA SA with a bid that still makes financial sense.

Elsewhere, Suncorp-Metway added % while the remainder of the big four banks were all up between 1.2% and 1.4%.

The consumer discretionary sector put in a good performance too, rising 1.5%. Ten Network was the biggest winner, gaining 3.4% while Myers, News Corp., Tattersalls and Fairfax were all up more than 1.7%.

Industrial names had a good session, rallying 1.2% thanks to gains of 4.3% and 3.9% in shares of Leighton Holdings and James Hardies.

The materials sector also saw buying pressure, closing the session 1.2% firmer. Bluescope and Newcrest topped the group, rising 2.6% and 2.5% respectively. Heavyweights BHP and Rio advanced 0.7% and 0.6% while junior iron ore miner, Sundance Resources surged 18.9% following yesterday’s MOU with China Rail.

Elsewhere in the space, Medusa Mining rose 2.5%. In a note from Citigroup, it said Medusa Mining is its preferred gold exposure, and it maintains its buy rating and $5.50 target price. Citi cited a host of reasons for this preference: low cost production from high grade ore; relatively cheap metrics for sector; significant upside potential from mine expansion and ongoing exploration. Citi believe the production and reserve upside potential at Co-O (mine) make Medusa one of the more attractive M&A opportunities in the global gold space. The broker thinks any producer who is looking to either consolidate the Southeast Asian gold space (or gain a footprint in it) is likely to look at Medusa.

On the downside, the energy sector was the biggest drag, losing 0.4%. Santos did most of the damage, plunging 7% after it surprised the market this morning by announcing it has sold a 15% stake in its Gladstone LNG joint venture to Total for $650 million. Most were expecting Santos to sell a stake to Korea Gas Corp. which had confirmed talks with Santos amid widespread speculation it was poised to take a 10% stake. Santos said it's still talking to Kogas about LNG offtake and a further potential project equity selldown. Analysts expect a two-train LNG development will cost about $15 billion to build but any buyer would have to fund its share of the project's construction.

Recent analyst reports have estimated that a 20% stake in the project could be sold for around $800 million-$1 billion, so Total's price of A$650 million for 15% is broadly in line with expectations. Nonetheless, it seems the market is worried that the rate was at a discount to what Petronas paid for its original stake in the JV two years ago, as well as the prospects for a share issue.

Ben Potter
Market Strategist
IG Markets

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