IG Markets - Australian Market Wrap August 31 2010

IG Markets - Australian Market Wrap

Across Asia, regional markets are all lower this Tuesday following the weak US leads. Disappointing personal income data in the US ignited further fears over the potential for the double dip recession. The Nikkei 225 is the worst performer, down 3.6% while the Shanghai Composite, Kospi and Hang Seng are all lower between 07% and 1.1%.

In Australia, the ASX 200 closed 1.1% weaker at 4404.2, just off its lows of 4403.9. Despite a brief rally following the better-than-expected building approvals and retails sales data, falls were broad based. The heavily weighted financials, materials and energy names did most of the damage as investors shied away from cyclical stocks, instead choosing to bid up more defensive sectors like healthcare and telecommunications.

Nonetheless, the local market did outperform US leads on a relative basis today. The strong economic data releases mid morning and likely end-of-month fund buying were probably the main drivers. The selling on Wall St lacked conviction, with volumes continuing to be muted at best.

US markets and sentiment continues to be very skittish. For example, Friday saw good gains following the stronger-than-expected GDP read and Bernanke’s reassurances. Yet yesterday, all the good from Friday’s session was forgotten, with the market selling off heavily on a slightly weaker personal income report. This even followed a good consumer spending report.

At the end of the day, we’re continuing to see a battle between the bulls and bears – those who believe we’re headed for a double dip and those who believe it’s a soft patch in a bigger recovery.

In economic news, the AUD/USD hit a morning high of 0.8956 after better-than-expected Australian data was released. Retail sales rose 0.7% in July from June; economists had expected a 0.4% increase on average. The dollar was also helped by an unexpected rise in building approvals from June to July of 2.3%; economists had on average expected a 1.0% fall. The current account deficit also narrowed more than expected in 2Q from 1Q, to $5.6 billion vs economists expectation of $6.5 billion. And, private sector credit continued heading north, rising 0.1% from June to July, leaving it up 2.8% on year.

In a note from Commonwealth Bank, it said Australian retail sales show few signs of waning consumer caution and building approvals hint at a strong turn for residential construction, which will fill the gap left by fiscal stimulus The broker said it’s certainly an encouraging set of numbers from that perspective, and for 2Q GDP it thinks the numbers point towards on-quarter growth of 1%, which is a pretty good result.

Across the market it was almost the exact opposite of what we saw yesterday, with the material, energy and financial sectors detracting most of the points.

Following weakness among US resource stocks, the materials sector finished the day 1.3% lower, with heavyweight BHP Billiton the worst, down 2.2%. Elsewhere, Alumina, Bluescope Steel, Amcor and Rio Tinto were all down between 1.3% and 2%.

The energy sector was another big decliner, losing 1.6% after Crude Oil futures declined more than 1% in overnight trade. Origin Energy was down the most (-2.1%), although it did go ex dividend while WorleyParsons, Santos and Woodside Petroleum all fell more than 1.4%.

Financials also did significant damage. The sector lost 1.3%, with the big four banks all following their US peers lower. They were down between 0.5% and 2.8%, with Westpac Banking Corporation the worst. Elsewhere, Axa, AMP and QBE Insurance Group were weaker by more than 1%.

The consumer discretionary sector managed to outperform its US counterpart, only declining 0.6% for the day. However, the good retail sales numbers did little to help the retailers, with Harvey Norman, Billabong International and David Jones among the worst performers. They were down between 1.2% and 2.3%.

On the upside, the defensive healthcare and consumer staples sectors outperformed.

In an interesting broker report from Macquarie Group, it said in light of the recent Australian reporting season, it has added JB Hi-Fi, United Group and ANZ to its model portfolio, while cutting Westpac and James Hardie. The broker maintains its retail sector overweight as the sector was a standout, with positive results and improving prospects and notes that JB HiFi continued to record outstanding operational gains. Macquarie also noted high quality results and mid-teens FY11 EPS growth prospects for contractors. Among banks, the broker said ANZ margins were resilient, while Westpac lagged, with a large exposure to the domestic housing market. Macquarie remains overweight on resources stocks, as the rate of decline in China's leading economic indicator slows. However, on the other hand the broker believes that the US housing market remains very tough and with less than two months before its seasonal slowdown, it's too late for James Hardies to see any real improvement until after March 2011. Macquarie also trimmed News Corp’s weighting as low US consumer confidence is impacting performance.

Ben Potter
Market Strategist
IG Markets

ENDS

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