IG Markets - Australian Market Wrap Sept. 30, 2010

IG Markets - Australian Market Wrap

In Asia, regional markets are mostly lower this Thursday after US markets closed lower overnight after a volatile session. The Nikkei 225 is the weakest performer, down 2% but is still set to book its best monthly gain in six months. Elsewhere, the Hang Seng is 0.3% lower while the Shanghai Composite is 1.5% firmer after the indexe’s property sector jumped 2.5%, with investors buying back into it after authorities clamped down on speculation in the real estate sector.

In Australia, the ASX 200 finished 1.3% weaker at 4582.9, its lows of the session. While the local market opened fractionally to the upside, weaker-than-expected economic data and heavy quarter-end profit taking saw the market drift lower throughout the day. Losses for the day were broad-based with the consumer staples, financials, materials and industrial sectors feeling the full force of the selling.

We’ve saw significant underperformance from the local market today as traders and investors booked large and unseasonal September gains. We see this weakness as being short lived and would potentially expect to see the upward momentum return in coming days.

Looking forward, October trade is likely to be dictated by the upcoming US earnings season, as well as the continued focus on economic data ahead of the early November FOMC meeting. Also, we may see some volatility in equity markets as US mutual funds engage in typical end-of-year tax-loss selling.

In economic news, the Australian financial system continues to be the envy of Europe and the US as the RBA said bad debt charges have generally peaked, and bank profits are increasing. In its latest 6-month review of the financial system, the RBA said the stock of non-performing assets on bank balance sheets are stabilising at lower level than in previous cycles, while access to funding markets has improved. The central bank added charges for bad and doubtful debts are expected to decline further in coming quarters. With the RBA's next meeting set for Tuesday, banks' strength coupled with the ongoing mining boom could tip the RBA into resuming their tightening cycle after pausing since May.

Also, in a comment from Commonwealth Securities, it said the Australian property sector is clearly undergoing a period of much-needed consolidation with prices down 0.2% in August. Commonwealth notes cumulative rate hikes, substantial boost in construction activity and double-digit growth in property prices over the past year have given potential home buyers a valid reason to be more circumspect about future purchases. The broker believes the housing sector is cooling but not about to collapse and adds property prices are still up 8% on a year ago. Commonwealth sees strong population growth, low vacancy rates and unemployment sliding - all conducive for a more optimistic longer-term view of the domestic housing market.

Turning our focus to the market and it was the consumer staples and financial sectors that led the market lower. They fell 1.6% and 1.7% respectively.

National Australia Bank was the worst performer among financial names, losing 2.2% while the other three major banks were lower between 1.7% and 2%. In a note from UBS, it downgraded National Australia Bank to neutral from buy, and cut its price target to $27.50 from $32.50. UBS believes the jewel in NAB's crown remains its business bank, which generates 50% of net profit. However, the broker notes areas of risk, including a weak core-earnings outlook in key operations, margin pressure, unpredictable market value moves of CDO hedges, core Tier 1 at 6.8% appears tight and the impact on investor trust from its failed AXA APH bid. JP Morgan said that given NAB's sharp rally post withdrawal from the AXA deal, it is now again trading broadly in line with valuations.

Among staples names, Goodman Fielder, Coca-Cola Amatil, Wesfarmers and Woolworths were all down between 1.4% and 2.6%.

The energy and material sectors also saw solid selling pressure, declining 1.1% and 1% respectively. Whitehaven Coal, WorleyParsons, Woodside Petroleum and Santos were all down more than 1.2%.

Bluescope Steel fell the most among material names, losing 2.2%. Elsewhere, diversifieds Rio Tinto and BHP Billiton were lower by more than 0.6% while Fortescue Metals Group bucked the trend, rallying 1.2%.

Among the smaller names, Lynas Corp and Murchison Metals managed gains of 0.4% and 1.5% respectively. Murchison reiterated that Mitsubishi supports their joint venture in Western Australia. Mitsubishi on Monday told Dow Jones Newswires there was no truth to media reports it was reconsidering its involvement in the JV. Today, Murchison quoted Mitsubishi as saying the talk is "completely groundless".

Also, in a broker report from JP Morgan, it increased its target price for Lynas by 31.5% to $1.71 from $1.30 after the company announced an off-take agreement with "a major Japanese rare earths consumer". JPMorgan, Lynas' second-biggest shareholder, said "in its view, the stock has justifiably re-rated in line with significantly higher rare earth prices that reflect recent Chinese initiatives to consolidate domestic supply and restrict export supply”. The broker believes that the Japanese customer is major parts or automotive company and estimates the contract is 1,000 tons - 2,000 tons a year. It means more than 50% of Lynas’s phase one production is already covered by letters of intent or off-take agreements.

Ben Potter
Market Strategist
IG Markets

ENDS

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