IG Markets - Australian Market Wrap Sept. 15, 2010

IG Markets - Australian Market Wrap

In Asia, regional markets are mixed this Thursday despite the very positive overnight leads from Wall St and relief brought about by the new Basal 3 banking rules, which were more lenient than anticipated. Uncertainty as to the leadership vote in Japan is also keeping investors on the sideline. The Kospi and Nikkei 225 are both down 0.3% while the Shanghai Composite is flat and the Hang Seng higher by 0.3%.

In Australia, the ASX 200 finished 0.3% firmer at 4626.5, just off morning highs of 4649. The materials, energy and consumer discretionary names added the bulk of the points while the typically defensive sectors underperformed.

Whilst we haven’t seen significant amounts of profit taking yet, it’s unlikely to be too far away. August US retail sales could be the catalyst tonight, with the market expecting a gain of 0.4%. With 70% of US GDP attributed to the consumer, there has been a lot of focus recently as to the health of the consumer and their spending patterns.

Given the recent run, it appears the market is expecting the recent improvement in economic data to continue – some of the gains might be already in the price. We could easily see a buy the rumour, sell the fact type scenario. Gains are likely to be hard to come by unless it smashes expectations.

Technically, the ASX 200 looks to have broken out above its recent trading range high of 4600, which is very positive indeed. We’ll probably see some consolidation, or perhaps a pullback to the 4600 before the market looks to push further ahead. This would certainly be healthy, potentially building a base for more gains.

In economic news, Australian business confidence rose strongly in August despite the political uncertainty. However, business conditions stayed patchy with employment and retail sales weak, potentially increasing concerns about a two-speed economy. The National Australia Bank survey showed business confidence rose 9 points from July to +11 points, while business conditions remained unchanged at +5 points.

Interestingly, in an FX comment from National Australia Bank, it believes a push to a new 5-month high for the AUD/USD depends mostly on global economic outlook boosting risk appetite and commodity prices. The broker’s short-term model suggests that a 10 percentage point rise in our risk-appetite index to 71% and a 10% rise in the Journal of Commerce industrial metals price index would push up the AUD fair value to almost 0.9600.

On the market, the materials sector added the most points, rising 1% for the session as investors appetites for risk continued to improve, boosting commodity prices. Bluescope Steel topped the leaders for a second consecutive day, adding 2% while Orica, Newcrest, BHP and Fortescue were all stronger between 1% and 1.6%.

Rio Tinto fell 0.2% after it announced plans to US$803 million ramping up production from its Argyle diamond mine in Western Australia.

The energy sector had a very strong session, rising 0.8% despite a flat night for crude oil prices. Macarthur Coal was the standout, jumping 6.7% following a broker note. A report from Southern Cross Equities suggested Peabody is likely to revisit its previous bid for Macarthur Coal after failing to reach agreement on its revised $15/share bid a few months ago. Southern Cross said Macarthur has since retreated to the low $11 range as institutions thought it paid too much for the MDL 164 coal tenement in Queensland. Nonetheless, the broker believes Macarthur’s most strategic assets for large rivals are its unallocated port infrastructure. Southern Cross sees a great one week buying opportunity in Macarthur as the stock is seeing forced selling from small cap fund managers after it was added to the S&P 100 index.

Elsewhere, Santos, Whitehaven Coal, Caltex and Origin Energy were all up more than 0.6%.

Southern Cross Equities put out a note on Whitehaven Coal too, saying it believes the coal miner is likely worth $7.50-$8.00/share to a corporate rival and investors should continue buying near $6.00. The broker said it doesn’t think that control of Whitehaven is going to change hands at $6.00 as Whitehaven has key growth assets in its main Narrabri mine and other projects (10 million tons per annum of mine capacity two years from now). Southern Cross notes that Whitehaven also controls an 11% stake in the NCIG coal export terminal at Newcastle; therefore they control port allocation, which is very valuable to competitors. The broker thinks the persistent share price strength suggests there is genuine corporate interest in the stock.

Consumer discretionary names added points, with Aristocrat leisure, Billabong International, David Jones and Ten Network all up more than 1%.

The financial sector finished the day flat. Macquarie Group rose 1.3% and QBE 1.1%, only to be offset by falls in Suncorp-Metway and Axa.

Ben Potter
Market Strategist
IG Markets

ENDS

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