Australian Stock Market Report – Afternoon 10/2/2012

MARKET CLOSE
(4.30pm AEST)

The Australian sharemarket rose for the fourth consecutive session, with the All Ordinaries Index (XAO) rising by 1 pct or 43.6 pts to 4451.9. Despite the improvement, volume and value of shares exchanging hands remained light due to public holidays in China, Hong Kong and India.

The big catalyst for the gains was the Reserve Bank's (RBA) decision to cut rates for the first time since June this year. Rates were cut by 25 bps (0.25 per cent) to 3.25 per cent. Banks were split on the likelihood of a rate cut today with two of the majors expecting a drop today, with the remainder seeing a November cut as more of a likelihood.

Last night, most global sharemarkets rose strongly following some signs of improvement in the European and American manufacturing sectors. The jobless rate in the Eurozone however remains at an unsustainable 11.4 pct. The U.S market rose by 0.5 pct, shares in France and Italy jumped by around 2.5 pct while the German market gained 1.53 pct.

Today, the retailers were amongst the biggest beneficiaries of the rate cut, with the likes of JB Hi-Fi (JBH) and department store owner, Myer (MYR) the best performers. David Jones (DJS) and Harvey Norman (HVN) are also worthy of a mention. JBH rose by 3.3 pct or 30 cents to $9.38, MYR gained 3.49 pct or 6 cents to $1.78, DJS edged higher by 0.8 pct or 2 cents to $2.52 while HVN improved by 1.04 pct or 2 cents to $1.94.

Commodity prices were mostly stronger overnight which helped our mining and energy players lead the way. BHP Billiton (BHP) ended 1.27 pct or 42 cents higher to $33.54 while Rio Tinto (RIO) also gained by 1.16 pct or 62 cents to $53.98.

The major banks gained by as much as 1.06 pct, with National Australia Bank (NAB) the standout.

Iron ore miner, Fortescue Metals (FMG) was placed in a trading halt this morning ahead of an announcement on a court ruling. The High Court of Australia found FMG and Andrew Forrest innocent of misleading investors in relation to mining agreements with a number of Chinese groups almost a decade ago. FMG shares rose 1.43 pct or 5 cents to $3.55.

The High Court told Qantas (QAN) today that it will not be able to claim back around $34 million in GST payments on unused and non-refunded tickets. The court essentially ruled that the airline still provided a service to those customers, which means that tax needs to be paid. QAN shares still rose by 2.52 pct or 3 cents to $1.22 as it said this would have a negligible impact on its financial position.

On the economic front, a weekly report issued by the Australian Institute of Petroleum (AIP) showed that fuel prices fell by just 0.1 cent to 145.6 cents a litre last week. CommSec still expects a 1-2 cents drop over the next fortnight for the price of unleaded petrol.

CommSec Economist, Savanth Sebastian said that "Petrol prices have been effectively holding around $1.45 a litre for the past month, well above the average fuel price over the past three years of $1.35 a litre. And given that fuel is the single biggest weekly purchase by households, it is having an adverse impact on the household budget."

As mentioned earlier in this article, the RBA decided to cut rates by 25 bps today to 3.25 per cent. The fact that the outlook for global growth has softened; growth in the U.S remains modest; China is slowing; activity in the Eurozone is contracting; commodity prices are low; labour market is soft and inflation is under control, the RBA saw no reason to hold off cutting rates earlier rather than later.

In general a rate cut is seen as a positive for the majority of consumers; however CommSec's Chief Economist, Craig James today gave a slightly different perspective. "...While rate cuts have in the past acted to stimulate activity, the impact on the economy today is more ambiguous. While rate cuts help borrowers, they hurt savers. The number of savers has soared and currently deposits are creeping up to be almost neck and neck with loans. Deposits represent around 90 per cent of loans outstanding; well up from 75 per cent just five years ago. Further only a third of households benefit from a rate cut with a third of families renting while a third of families fully own their homes. The non-home buying public tend to be savers rather than borrowers. So a rate cut will hurt all the families living off interest income. The $64 question is confidence. If people don't have the confidence to spend and instead continue to save and pay off home loans at a faster rate, then the rate cut will have no impact on activity. It is also important to note that it is the level of interest rates that does the hard lifting work in the economy, not the change in rates. Interest rates are already below longer-term averages. And judging by what has happened in previous months, home borrowers are more likely to respond to a rate cut by paying off their home loan at a faster rate, rather than going on a spending spree."

No major economic news was issued across Asia-Pacific today and most markets recorded negligible moves. Shares in Japan eased by 0.12 per cent while shares in the Philippines ended a few points in the red. Public holidays were observed in China, India and Hong Kong today. Tomorrow, both the Chinese and South Korean population will be on holidays.

In Europe tonight, a 10-year bond auction and construction PMI will be issued in the U.K.

In the U.S, the September report for the number of new cars sold in September will be released. A modest increase from 14.47 million to 14.5 million is expected (annual sales).

Volume of shares traded came in at 1.68 billion today, worth just $3.57 billion. 585 shares were up, 353 were weaker and 343 ended unchanged.

At 4.30pm (AEST) on the Sydney Futures Exchange, the ASX24 futures contract is up 0.23 pct or 10 pts to 4444.

Due to daylight savings, most major European markets are now trading between 5pm (AEST) and 1.30am (AEST). Futures are currently pointing to a lower start to trade.

U.S futures are pointing to a stronger start tonight. Due to daylight savings taking place in the second week of March in North America and the end of daylight savings in Australia, U.S markets will now be trading between 11.30pm (AEST) and 6am (AEST).

Turning to currencies, the Australian dollar (AUD) lost ground against the greenback following the RBA's rate cut. Just before 2.30pm (AEST), the AUD was buying US103.7 cents. The AUD now buys US103 cents and hit a low of US102.9 cents a little earlier. Our currency is trading at £63.7 pence and €79.8 cents.

Australia is a commodity based economy, with commodities in general account for almost 80 pct of all our exports over the past nine months. In essence, when the going gets tough globally, there is fear of less demand for our commodities, which tends to result in a weaker AUD.

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