IG Markets - Close Of Business Wrap August 2, 2010

IG Markets - Close Of Business Wrap

Asian markets are seeing green today as a sense of confidence spreads through the region. Whilst the Chinese PMI data came out in line with forecasts it beat the ‘whisper numbers’ that had been calling for a contraction in manufacturing, although the same survey conducted by HSBC did actually show contraction with the index reading 49.4. These numbers can be read with a bullish or a bearish stance, however what is important is the Shanghai composite is trading 0.7% higher at 2655. Risk currencies were bid up in early Asian trade which saw the Yen weaken and the Nikkei gaining 0.4%.

The Australian market followed the Asian strength and whilst Wall Street settled unchanged Australian investors pushed the index above last week’s high intra-day, with the ASX 200 closing up 1.1% at 4541. There appears to be no clear cut mind set amongst traders and whilst the index pushed higher with confidence there was no real rotation out of defensive stocks into risk and cyclical stocks. Volume was also extremely light given it is a public holiday in New South Wales.

The strength in the Australian dollar has been one of the many reasons buoying the Australian market today, as an appreciating local currency makes stocks more appealing. It will be a key week for the Australian dollar in terms of setting future direction and whilst the recent rise may hurt some of our exporters (Australian dollar strength makes their exports less attractive) you may also see foreign institutional money flows into this space which could counteract this affect.

Last week the CFTC traders report showed net long futures positions increased 23%, showing that whilst the CPI data was lower than expected, traders have heightened expectations for Asian growth. We may be limited to maybe one or perhaps if we see something dramatic happen, two interest rate rises this year so the Australian dollar for now will be traded as a proxy for Asian growth over a yield play. Recent strength in base metals and an ever improving European situation is also helping sentiment towards the currency.

Financials putting in the bulk of the points today as you would expect given their sizable weight on the index. The big four banks were all stronger between 0.7% and 1.6%, with Macquarie outperforming the market, up 1.3%.

Whilst Deutsche cut Macquarie’s price target to $56.60, UBS upgraded the company to a ‘Buy’ recommendation, saying “while difficult market conditions are leading to further EPS downgrades and pressure on near-term p/e, Macquarie is now trading on 1.1X forward book value and recent asset sales and capital raisings will help to support book value. As a result, we are becoming more comfortable with MQG's valuation despite substantial headwinds”. They added "we believe the current price reflects this realistically cautious outlook."

The Industrial sector closed up 1%, with a sea of green across the space. Significant gains were seen in Virgin Blue and United group, up 1.6% and 1.3% respectively. Downer EDI was the big laggard, finishing down 6.2% after a change of management has seen CEO Geoff Knox replaced by CFO Grant Fenn.

Elsewhere, Material stocks were supported by higher commodity prices with Fortescue metals leading the charge, up 2.6%. BHP and Rio Tinto gained 0.5% and 0.8% respectively.

In the Energy space names like Oil search and Santos outperformed, supported by a higher crude price. However, the star performer once again is Linc Energy who is not far off the highs of the day with a gain of 18.5%. The Australian newspaper reports that India’s Adani Enterprise will sign a deal tomorrow to purchase Linc’s coal tenements in Queensland.

With the index pushing through last week’s high, a move to 4602 (the 100-day moving average) seems to be the next stop. There is every possibility we could see volatility increase this week, with many heavyweight companies due to announce earnings and key economic data (see weekly calendar) due out.
Tomorrow’s interest rate decision will be interesting and whilst no one is expecting the RBA to act the rhetoric they provide could see the Australian dollar trade convincingly above 91c. Retail sales and building approvals come out at 11.30 with economists looking for modest growth here.

Kind regards,
Chris Weston
Institutional Dealing
IG Markets

ENDS

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