IG Markets - Australian Market Wrap Sept. 29, 2010

IG Markets - Australian Market Wrap

Across Asia, regional markets are higher this afternoon following the positive overnight leads. The Hang Seng is the top performer, up 1.3% while the Nikkei 225 is 0.7% firmer after this morning’s weaker-than-expected Tankan survey suggested the BOJ may discuss further moves to ease monetary policy. Elsewhere, the Shanghai Composite and Kospi are both up more than 0.4%.

In Australia, the ASX 200 closed 0.5% weaker at 4645, having earlier traded as high as 4698. The consumer staples, financials and energy sectors did most of the damage on the downside while modest gains among materials and industrials helped to pare further declines.

In almost direct contrast to yesterday’s trade, the local market opened higher this morning and drifted all session to close lower. After such a strong September rally, it looks like the market has reached a point where a fresh catalyst is needed to propel it higher.

With month and quarter-end fast approaching, it looks like participants who have enjoyed the September gains may be looking to ‘square the ledger’ and book some profits. There are still some concerns that potential tax-loss selling in October by US mutual funds could see the market’s retreat from current levels in the coming weeks.

On the market, the consumer staples sector was the worst performer, losing 1.6%. Goodman Fielder declined the most, down 5.3% while supermarket giant Woolworths and conglomerate Wesfarmers fell 1.5% and 1.8% respectively.

Financials came under pressure too, finishing 0.8% weaker for the session despite stronger overnight leads. Axa fell the most, down 1.8% while the big four banks were all lower between 0.7% and 1.3%, with Westpac the worst.

Energy names saw selling with the likes of Origin Energy, Caltex Australia, Woodside Petroleum and Santos all lower by more than 0.6%.

On the upside, the industrials sector managed to eke out a gain, adding 0.1%. Toll Holdings, Downer EDI and Boral were the best performers, all up more than 1.1%.

The materials sector had a good session too, rising 0.1% and helping to pare further losses. Gold miner Newcrest Mining added the most, up 1.6% after gold futures hit a fresh record high of US$1311 per ounce overnight. Orica and Rio Tinto were stronger by 1.6% and 0.3% respectively. BHP Billiton finished the session 0.2% lower.

Brokers touring BHP Billiton's 57.5% owned Escondida mine in Chile, the world's largest copper project, see great potential for production increases, but the wait may be years. A comment from UBS said Escondida production appears largely flat through to FY13 against current production of about 1.1 million tons a year; improved grades and infrastructure will improve the picture from FY14, but even Organic Growth Project One, starting in 2015, will only raise production to about 1.3 million tons a year; the "significant step change in growth" will have to wait for the addition of more concentrators with Organic Growth Project Two. Nonetheless, exploration has major upsides, with UBS seeing about US$300 million being spent in the next 5 years and Citigroup arguing that Escondida's resource base of 8.51 billion tons at 0.61% copper could be tripled. Citigroup said the mine is still fantastic asset for BHP and 30% owner Rio Tinto, with 85 US cents/lb cash costs "well positioned in the second quartile of the copper cost curve" and comparing to current LME 3-month prices of US$3.61/lb.

In stock specific news, Lynas Corp. had another strong session, rising 2.6% to continue its stellar run. Despite a lack of detail on the identity of the consumer or size of the contract, Lynas this morning announced a new deal with a Japanese consumer. Jitters over China's greater-than-90% control of rare earths production have more than doubled the value of Lynas shares over past three months. Furthermore, last week's reports--later denied--of China restricting exports to Japan amidst a political dispute have put more fire under prices. In a comment from BBY, it pointed out that even without a named company, the announcement is another step forward in Japan’s commitment to diversify its supply of rare earths. The broker said "rare earths companies have been very reluctant to talk about off-take partners because the partners are worried about China turning off the tap on supply. This preparedness to go on the record that they're going outside of China is new and reinforces their interest in these companies."

Ben Potter
Market Strategist
IG Markets

ENDS

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