Australian Stock Market Report – Afternoon 10/5/2012

MARKET CLOSE
(4.30pm AEST)

The Australian sharemarket improved for the seventh straight day today, rising by 2.5 per cent over the past five sessions alone. This is the longest winning streak in over 18 months and the best weekly performance for local equities since late July. Despite the gains, this has been one of the quieter weeks of the year due to a number of public holidays across Asia Pacific. The Chinese markets have been closed for five days straight but should resume trade next week. The market has also been quiet partly due to an important jobs report out tonight at 10.30pm (AEST).

Earlier in the week, the Reserve Bank of Australia (RBA) decided to cut interest rates by 25 bps for the first time since June. Today, National Australia Bank (NAB) and Commonwealth Bank of Australia (CBA) both cut rates by 20 bps. Westpac (WBC) cut rates by 18 bps while ANZ Banking Group (ANZ) makes its rates decision in accordance to its own calendar.

Westpac (WBC) shares rose 1.21 per cent or 31 cents to $25.88, ANZ Banking Group (ANZ) gained 0.79 per cent or 20 cents to $25.50, NAB jumped 0.61 per cent or 16 cents to $26.31 while CBA edged higher by 0.53 per cent or 30 cents to $56.85.

The mining sector was the standout and lifted the rest of its market on its broad shoulders today. Iron ore miner, Fortescue Metals (FMG) strengthened by 4.64 per cent or 16 cents to $3.61. Gold producer, Newcrest Mining (NCM) rose by 3.12 per cent or 88 cents to $29.12, Rio Tinto (RIO) jumped 1.76 per cent or 95 cents to $54.90 and the larger BHP Billiton (BHP) ended 1 per cent or 33 cents stronger to $33.32.

The ASX held its Annual General Meeting (AGM) today and finished the day 0.76 per cent or 23 cents lower to $29.86. Underlying profit for the year fell by 2.9 per cent to $346.2 million. The ASX is the world's eighth biggest exchange by market capitalisation. The number of new listings has fallen by around 11 per cent over the year.

Surfwear retailer, Billabong (BBG) fell by 1.4 per cent or 1.5 cents to $1.06 today after being in a trading halt for a few hours yesterday afternoon. This was off the back of speculation that a second private equity firm could pull its takeover offer for the business. Today, BBG said that it's working through concerns identified by TPG Capital regarding its $694.5 million bid.

No major economic news was issued in Australia today, however data has been largely disappointing over the past five sessions.

On Monday, a Chinese manufacturing reading showed that the sector has contracted for yet another month.

Locally, the monthly inflation gauge along with a manufacturing report were both issued on Monday. As expected, inflation only rose by a very modest 0.2 pct in September after rising by 0.6 pct in August.

CommSec's Chief Economist, Craig James said that "Inflationary pressures are still well-contained, keeping the door open for a rate cut in the next few months. While we favour a move in November rather than October, we don't hold the view too tightly. The latest survey shows manufacturing is still contracting, the services gauge will probably show a similar contraction this week, and inflation is contained. But on the other hand, economic growth is close to 'trend', home prices are rising, business lending is creeping higher, the Aussie dollar has eased in recent weeks and the global economic situation is improving."

On Tuesday, the Reserve Bank (RBA) decided to cut interest rates for the first time since June by 25 bps to 3.25 pct. 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."

On Thursday, retail spending and building approval reports were both issued. Retail spending rose by a modest 0.2 per cent in August after falling by 0.8 per cent in July.

CommSec Economist, Savanth Sebastian said that "At present it is clear that consumers are remaining conservative and holding back on significant retail purchases. In fact spending on non-food retailing barely budged, up by just 0.1 per cent in August. However over coming months the lower interest rates on offer and fiscal stimulus by Federal will support household budgets and should have a longer lasting impact on activity levels. Interestingly department stores which bore the brunt of the weakness in July recorded a healthy rebounded in August. While Western Australia which has been on the frontline, when it comes to the slowdown in the mining sector, recorded a rebound in activity. Despite the improvement in sales there is no doubt that lower pricing continues to play a key part in enticing a rather nonplussed consumer. Most businesses would tell you that it is hard work to make a quid. The key is an ongoing improvement in confidence, until confidence levels stage a sustained improvement it is likely that sales will be patchy."

The number of building approvals granted to developers by councils in August rose by 6.4 per cent, which was more than expected. Keep in mind that approvals slumped by 21.2 per cent in July.

Mr Sebastian said that "Dwelling approvals have also not shown a clear cut sign of a turnaround in recent months. However the incentives provided by state governments on new building construction, coupled with lower interest rates should ensure that the outlook for the housing sector looks more upbeat. In addition with home prices and equity markets rising the stage has been set for a healthy turnaround in activity."

No major economic news was issued in the region today; however the market would be looking to tonight's monthly jobs report out of the U.S. One of the biggest problems in America has been lacklustre jobs growth. This will be particularly important leading up to the U.S Presidential elections. A better than expected report will be good news for President Obama while a disappointing result will give additional ammunition to the Republicans. The market is expecting between 120,000 and 135,000 jobs to have been created in September. A significantly better result should be good news for markets.

In Europe tonight, quarterly growth numbers will be issued at 7pm (AEST) and is expected to show a slight contraction. At 10.30pm (AEST), a report on the number of factory orders in Germany will be issued.

Volume of shares traded came in at 1.69 billion today, worth just $3.42 billion. 604 shares were up, 340 were weaker and 365 ended unchanged.

At 4.30pm (AEST) on the Sydney Futures Exchange, the ASX24 futures contract is up 0.72 per cent or 32 pts to 4492.

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

U.S futures are pointing to a stronger start tonight also. 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 partly due to the RBA's rate cut on Tuesday and weaker commodity prices offshore. The AUD now buys US102.5 cents and has fallen by around US1 cent against the greenback since last Friday. Our currency is trading at £63.3 pence and €78.86 cents.

Australia is a commodity based economy, with commodities in general accounting 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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