IG Markets - Australian Market Wrap July 8, 2010

IG Markets - Australian Market Wrap

Across Asia, regional markets are mostly higher this Thursday after the strong set of leads from Wall St. Positive comments on the growth of US retail sales eased concerns over the world’s biggest economy slowing further. The Nikkei 225 is the top performer, up 2.7% while the Hang Seng and Kospi are both adding 1.4%. The Shanghai Composite is bucking the trend higher, currently down 0.3%.

In Australia, the ASX 200 closed 2.4% firmer at 4356.7, its highs of the session. On the back of such a strong US session, gains for the local market were broad based with the heavyweight financials, materials, energy and industrial sectors all convincingly higher. While it will take more than one solid session to confirm a turnaround in sentiment, there is definitely a growing chorus of traders and investors suggesting global indexes are oversold, having priced in overly bearish scenarios.

It was certainly positive to see the market rally, and more importantly close on its session highs. The general consensus is that the market overshot on the downside, and we’re now seeing it snap back.

Sentiment and confidence have rebounded over the last two days, both locally and globally as next week’s US Q2 earnings season approaches. The upbeat guidance from State Street and positive comments from the International Council for Shopping Centres on retail sales eased the markets most pressing concerns.

There had been fears that US financials were going to struggle to meet analysts’ expectations, and that weaker consumer spending would drive the US back into recession.

Heading into the weekend, we’re likely to see optimism remain ahead of Alcoa’s report on Monday. The aluminium giant typically kicks off reporting seasons and is commonly seen as a bellwether for broader economic activity.

In economic news, the Australian jobs report shattered expectations this morning, sending the AUD higher and putting the local growth story back on traders' minds. Even as economic concerns continue to cast a dark cloud over Europe and the US, Australia looks to be side-stepping most of the problems. For June, Australia added 45,900 jobs, compared with forecasts of 15,000. The unemployment rate came in at 5.1%, better than the 5.2% expected.

In a comment from JPMorgan, it said after two months of pauses, today's robust Australia jobs report and late month inflation data will be the catalyst to an August rate hike. The broker said both full and part-time employment was strong, with an unemployment rate close to 5.0% (basically full employment). JPMorgan continued saying, while it's a lagging number for business sentiment, it's a leading indicator of price pressure. We're running out of people and that means pressure on wages and the RBA for more tightening.

Looking across the market, all sectors finished well into positive territory, up between 1.4% and 3.1%.

The financial sector was the standout, rising 2.9% and added the bulk of the points. This came on the back of very strong leads from the US financial sector which benefitted from positive comments from State Street. Macquarie Group was the biggest gainer, rising 6.3% while the big four banks all surged, jumping between 2.7% and 4.3%, with ANZ the best.

In a report from Goldman Sachs, it doesn't expect the RBA to hike before November as banks will do the work for them. Goldman believes that Australian banks are poised to pass through additional mortgage rate hikes independent of the RBA in coming months, in turn reducing the RBA's urgency to tighten.

The consumer discretionary sector had a very strong session as well, closing up 2.8%. Retailers led the way with Harvey Norman, Billabong International, JB HiFi, David Jones and Myers all rising between 3% and 5.8%, with Harvey Norman the top performer This came on the back of very positive comments from the International Council for Shopping Centres on US retail sales growth rates.

In the materials space, Fortescue and Bluescope Steel fronted the gainers, rallying 4.1% and 3.4% respectively. Heavyweights BHP and Rio added 2% and 1.8% respectively while gold miners Newcrest and Lihir rose more than 2.1%.

The energy sector put in a good performance, rising 2.1% as a whole after crude oil futures rose more than 4% overnight.

Among industrial names, beaten up Downer EDI clawed back some of its recent losses, rallying 4.8% to be the top performer. In a broker note from Merrill Lynch, it retained its buy recommendation on Downer. It said there is compelling value in the stock, despite a potential maximum liability for the Waratah train project of $1.2 billion. The broker believes the market's concern over the liability, Reliance Rail funding and Downer’s balance sheet are overdone. ML thinks it is unlikely Downer will incur the full $1.2 billion liability, but even if it does its shares should still be worth between $3.44 and $3.91. ML also believes the concerns over Reliance Rail's debt are unfounded, given it is non-recourse to Downer.

Elsewhere, James Hardies, Leighton Holdings and Qantas were all higher by more than 3.2%. In a broker note from RBS, it said Tiger Airways' expansion to an estimated 30 domestic aircraft by FY16 is likely to see Australian airline competition continue to intensify after a 15% fall in leisure fares over the last year. RBS estimates that Tiger enjoys significant cost advantage over both Qantas-owned Jetstar and Virgin Blue. RBS said Tiger's yields are also lower than rivals but with both vowing to compete to defend market share, the broker notes that something has to give, with Virgin much more sensitive to a drop in yields than Qantas. The broker retained its preference for Qantas, rating it a buy with a $2.99.

Ben Potter
Market Strategist
IG Markets

ENDS

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