Australian Stock Market Report - Afternoon 10/28/2011

MARKET CLOSE (4.30pm AEDT)

The Australian sharemarket surged in the first hour of trade today, with the All Ordinaries index (XAO) rising by as much as 1.5 pct. As the day went on however, the market gave away much of its impressive gains to end largely flat by close of business.

The miners and financials managed to end a touch higher overall with the world's largest miner BHP Billiton (BHP) up 0.89 pct or 34 cents to $38.69 while RIO Tinto (RIO) gained 0.75 pct or 52 cents to $70.22.

The big banks ended mixed while investment bank Macquarie Group (MQG) was one of the standouts after rising 3.29 pct or 80 cents to $25.15 today. The market shrugged off a worse than expected first half profit result and preferred to focus on the increased confidence out of Europe instead. Its first half net profit came in at $305 million which was down 45 pct on the previous half. The company announced a 10 pct buyback which is still subject to APRA approval. MQG also downgraded its guidance.

Commonwealth Bank of Australia (CBA) fell 0.06 pct or 3 cents to $49.96 while Westpac (WBC) dropped 0.35 pct or 8 cents to $22.68. National Australia Bank (NAB) gained 0.46 pct or 12 cents to $25.99 and ANZ Banking Group (ANZ) rose 0.36 pct or 8 cents to $22.08.

Markets overnight had their first chance to react to the outcome of the European Summit yesterday afternoon. The leaders in Europe agreed to a three pronged resolution to the debt crisis. Firstly, private banks agreed to accept a 50 pct write-off on their holdings of Greek bonds (debt). The idea behind this was to significantly reduce Greece's debt problems. The European Council President Herman Van Rompuy announced that both the International Monetary Fund (IMF) and the Eurozone nations would give Greece another 100 billion Euros.

The size of the continent's bailout/rescue fund was also increased to 1 trillion Euros which is more than twice as large as its current size. The major banks in Europe are also required to raise additional funds to shield them of potential problems arising from other European nations in the future.

With all the issues surrounding global economies over the past few years, the term "sovereign debt" has been popping up in almost every paper and in no shortage of news bulletins.

Sovereign debt is simply government debt. Governments around the world issue debt (bonds) to investors around the world to help a nation grow. Investors are essentially exchanging their money for bonds in a particular nation. In return for their investment, governments pay bondholders money a few times each year. Depending on the type of bond, after a certain period of time investors will receive their initial investment amount back.

The benefit to investors is that they receive interest on their money a few times a year whereas the governments can use the funds provided to them by the investors.

Sovereign debt is guaranteed by the government who issues the bonds. A problem is created when there are doubts on the stability of the country because it makes the buyers of the bonds concerned of their investment (i.e will they get all their money back?).

France and Germany currently have the most substantial exposure to Greek debt. France, Germany and the U.K have around US$100 Billion worth of debt in the troubled nation. The U.S has around US$7.3 billion worth of Greek sovereign (government) bonds, Italy has US$4 billion, Switzerland has close to US$3 billion and France alone has over US$56 billion worth of debt (bonds) in Greece.

It certainly would have been a tough day for Qantas (QAN) Chief Executive Alan Joyce today, with the airline holding its Annual General Meeting (AGM) this morning. This gives shareholders an opportunity to express themselves and ask questions of the company's board members. The meeting kicked off at 11am (AEDT) and lasted till 2.45pm (AEDT).

QAN shares managed to perform well today considering the bad press the business has had to endure. It has been estimated that the strike action has cost the company around $68 million in lost revenue so far or $15 million a week. The strikes are having more of an effect on the company's bottom line than the most recent volcanic ash cloud which cost the company $49 million.

Fuel costs have also increased by $500 million in the first half of the year, workers have been demanding more pay and its image is also being affected. Logically speaking if passengers are held up at airports, are late for a meeting on the other side of Australia or have their travel plans delayed, it reflects badly on the brand.

According to QAN, there have been over 70,000 passengers impacted by both cancelled and delayed flights.

QAN shares have been hit hard since the start of the year, currently down around 37 pct in 2011. This compares to the broader All Ordinaries index which is down only 8 pct.

It was quiet on the economic front in Australia today but it certainly was anything but subdued in Japan. The jobless rate in the world's third largest economy improved to 4.1 pct which was its lowest level since February 2009.

No major data is scheduled for release out of Europe tonight.

In the U.S on the economic front, personal income and spending data will be released while Amcol, AON, Barnes Group, Goodyear Tire, Merck, Newmont Mining and Whirpool are all issuing their third quarter profit results.

Next week the G20 Finance Ministers will meet, the Melbourne Cup takes place and the Reserve Bank of Australia (RBA) will be meeting to make a decision on interest rates. Rates have remained unchanged since November last year.

The volume of shares traded came in at 2.3 billion today, worth $8.2 billion. 655 shares were up, 396 finished weaker and 351 ended unchanged.

At 4.30pm AEST on the Sydney Futures Exchange, the ASX24 futures contract is down 0.02 pct or 1 pt to 4348.

Most major European markets trade between 6pm (AEDT) and 2.30am (AEDT). Futures in Europe are pointing to a stronger start to trade tonight.
Dow Jones futures are down 0.27 pct or 33 pts to 12135, indicating that U.S shares will likely kick off the session in positive territory when American markets open at 12.30pm (AEDT).

Turning to currencies, the Australian dollar (AUD) has given back some of its earlier gains but still buys US106.6 cents, which is more than US10 cents higher than at the start of October.

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