IG Markets Australian Market Wrap

IG Markets Australian Market Wrap

Good afternoon,

Across Asia, regional markets are mixed following the modest gains on Wall Street. The Kospi is the best performer, up 1% on a rise among technology players. The Nikkei 225 is also firmer, up 0.7%. On the downside, both the Hang Seng and Shanghai Composite are 0.2% lower.

In Australia, the ASX 200 finished the week with a gain of 0.6%, right on the session highs. Gains for the day were relatively broad based with the healthcare, energy, financials and industrial sectors all making solid contributions.

Markets look to have moved more into a ‘holding pattern’ over the last week or so. Globally, they’ve all had a good run over the past two months and are probably a bit stretched on a short to medium-term basis.

In relation to the US earnings season, it looks like the recent rally in stocks has all but factored in the stronger-than-expected results being delivered. Numerous stocks that have beaten expectations and raised forward guidance have seen selling pressure.

We’re likely to see this continue over the coming weeks as the market eagerly awaits its next catalyst. Domestically, next Wednesday’s CPI inflation reading will be key in determining whether or not the RBA hike interest rates before Christmas.

On a bigger scale, the early November Federal Reserve meeting, where it is expected chairman Ben Bernanke will detail to the market the scale and timing of further quantitative easing measures, will be crucial in determining a near-to-medium term direction for the US dollar. This will in turn have profound implications for equity, credit, currency and commodity markets.

In foreign exchange trade, the AUDUSD has recovered some of its overnight fall to be trading around the 0.9835 level. Attention is now turning towards the G20 meetings over the weekend, while next week’s inflation data will be key in determining whether or not the RBA raise interest rates. In a comment from RBC, it said the move lower in the AUDUSD isn’t alarming and that a sustained downtrend has yet to unfold, although prices have been choppy.

On equity markets, the healthcare and industrial sectors were the top performers, rising 1% and 0.8% respectively. Cochlear and Ansell rose 2.1% and 1.5%, boosting healthcare names while Brambles and Macquarie Airports topped the industrials.

The energy sector was a significant contributor, rising 0.8% despite a 1.5% fall in crude oil prices overnight. Paladin Energy was the top performer, adding 5.8% as a broker turned bullish on the sector. Elsewhere, the likes of Oil Search, Santos, Whitehaven Coal and Origin Energy were all firmer by more than 2%.

Woodside Petroleum was the biggest decliner, falling 1.5% after announcing an evaluation of costs and schedule of its $13 billion first phase of its Pluto LNG project in WA. A March 2011 first LNG target date is missing from company's 3Q production report. Woodside said "a comprehensive periodic cost and schedule evaluation is underway; the results of which will be available in November". It's unclear whether the statement implies that there will be any delays or cost increases. The project was 94% complete at the end of September, but Woodside said some onshore flare towers haven't met its strict design specifications to withstand strong winds. Woodside said some sections of the flare towers are being dismantled in preparation for the approaching cyclone season and corrective action. Third-quarter production and revenue doesn’t appear too surprising, with the company reiterating its FY production guidance. In a note from RBS, it said there's been some uncertainty hanging over Woodside for a while; people are just a bit worried about the supply pipeline.

The materials sector managed to shrug off the burden of a stronger overnight USD to post gains of 0.5%. Heavyweight names BHP Billiton and Rio Tinto rose by 0.9% and 0.4% respectively while Fortescue Metals advanced by more than 3.5% to be the best performer. Elsewhere in the sector, Orica and Alumina all saw gains of more than 1%.

The financial sector also managed to grind out a gain of 0.6% with a mixed performance across the four major trading banks. ANZ, Westpac and CBA all gained between 0.5% and 1.1%, while NAB was lower by 0.1%. More convincing performances were seen by Macquarie Group, IAG and Axa Asia Pacific which rallied between 1.5% and 1.7%.

In a broker report from Goldman Sachs, it believes Macquarie Group’s earnings forecasts have downside risk ahead of its 1H results on October 29. It said that whilst 1X book value has been a line in the sand at times in the past, their US peers trade on between 0.75 - 1.2X and on a p/e basis, it's on 13X vs peers 7.8-10.9X. Goldman’s assumes a 65% pickup in 2H earnings and still sees $960 million vs guidance at $1.1 billion. The broker continued saying, that whilst it’s cheap by historical standards, there's a good chance that this will continue to get cheaper; maybe at around $30 it will be time to have another look.

ENDS

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