Australian Stock Market Report - Afternoon 2/6/2012

MARKET CLOSE
(4.30pm AEDT)

The Australian sharemarket was travelling well for most of the session, until the Reserve Bank (RBA) decided to keep interest rates on hold at 4.25 pct. The All Ordinaries index (XAO) fell 0.5 pct or 19.7 pts to 4344.9. Most sectors lost ground following the RBA decision however the energy sector, the telcos and healthcare companies managed to end the day higher.

The reporting season has kicked off this week and there were a few companies releasing their results throughout the day. Cochlear (COH), the manufacturer of inner ear implants announced its half-year profit this morning (the six months between July to December 2011).

The company posted a profit of $80.1 million prior to significant one off costs. When you take into account the $100 million (after tax) costs of a product recall back in September last year, the company has posted a $20.3 million loss over the half.

COH's revenue was $387.4 million and there was a 9 pct fall in product sales to 10724 over that period. The company also announced an interim dividend of $1.20 a share which is scheduled to be paid to investors on March 13th.

Profit was a little better than expectations as was revenue. The declared dividend was 14 pct higher than in the corresponding period in 2012. One thing which was clear from the result was that the voluntary recall of one of its main product lines, the CI500 implant range has hurt the company's bottom line. COH shares were down 6.2 pct prior to today in the 2010 calendar year while COH shares rose 7.59 pct or $4.41 to $62.52 today.

The mining sector was worst hit today, with RIO Tinto (RIO) down 1.78 pct or $1.29 to $71.01 while BHP Billiton (BHP) lost 0.81 pct or 31 cents to $37.90.

Three of the four major banks lost ground today, with National Bank (NAB) by far the worst performer following a disappointing trading update. Macquarie Group (MQG) fell by 0.77 pct or 20 cents to $25.90 today after announcing a significant profit downgrade of as much as 25 pct. This was partly blamed on difficult global market conditions.

All eyes were firmly fixed on the Reserve Bank of Australia (RBA) and its rates decision out this afternoon. It was widely expected that interest rates would be cut by 25 bps (basis points) or 0.25 pct today to 4 pct. The market was factoring in a 76 pct chance of a rate cut today. The RBA surprised all those involved with the market by keeping interest rates unchanged.

Immediately following the decision the Australian dollar (AUD) rose strongly from US107 cents to US108 cents. The RBA meets on the first Tuesday of each calendar month (except in January) to make a decision on interest rates. The decision is announced at 2.30pm (AEDT) and can have a significant impact on both markets and currencies, particularly if the actual result is contrary to market expectations. The bank also always issues an accompanying statement with the rates decision which is freely available on the central bank's website (www.rba.gov.au).

In the first paragraph of the statement, Chairman Glenn Stevens acknowledged that the global economy is struggling however said that he sees sign of improvement in the European region nonetheless.

With rates remaining at 4.25 pct, Australia has some of the highest interest rates of any advanced economy. The official interest rates in Europe are at 1 pct while the Bank of England has rates at 0.5 pct. This gives the RBA more room to move on rates if necessary.

Commsec Economist, Craig James said that "The Reserve Bank clearly maintains an easing bias - a bias to cut rates. The key phrase of the statement was: "the Board judged that the setting of monetary policy was appropriate for the moment. Should demand conditions weaken materially; the inflation outlook would provide scope for easier monetary policy." Perhaps if the European situation deteriorates markedly, the next decision won't be whether to cut rate by 25 basis points, but rather 50 or 75 basis points."

Mr James continued by saying that "Despite the inaction on rates, there are still choices for those paying off home loans and those looking to enter the housing market. The 3-year fixed home loan rate stands at 6.35 per cent, around 1 percentage point below the variable rate. If you expect banks to cut the variable rate by more than a percentage point over the next few years then you would stick with the variable rate. But for those struggling with repayments or those looking to unleash some spending power, there are clearly options available."

The latest monthly statistics on overseas tourist arrivals and departures was also released today. The number of permanent settlers entering Australia hit a 34-month high in December. There was a 0.9 pct rise in the number of tourist departures while the number of tourists entering our border rose by a very modest 0.1 pct over the month.

Commsec's Chief Economist, Craig James said that "Aussies are still flocking abroad, encouraged by the strong dollar. In 2011 a record 7.8 million visits were recorded, far in advance of the 5.88 million visitor arrivals in the year. But it is by no means doom and gloom for Australia's tourism industry with arrivals from China soaring 19 per cent over 2011 while Indonesian tourists rose by 13 per cent. The tourism sector clearly needs to be focussing on the rising middle classes of Asia. Not only are incomes rising in the region but the potential number of tourists is particularly exciting for the industry."

In the region today, the New Zealand sharemarket traded for the first time this week following yesterday's national holiday (Waitangi Day). There was a lack of market moving economic data out today however the latest leading indicators index for December was released at 4pm (AEDT). This index is calculated by putting together 11 separate economic indicators to measure the direction of the Japanese economy.

Out of Europe last night, the latest report on factory orders was released at 10pm (AEDT) and ended better than expected. Rising purchase orders signals that manufacturers will increase activity as they work to fill in orders.

In Europe tonight, France's latest trade balance will be released. The market is expecting a deficit of around €5.2 billion to be recorded for December. The trade balance measures the difference between imported and exported goods over the month.

There was no major market moving economic data out last night in the U.S. Tonight will also be relatively quiet however Federal Reserve Chairman, Ben Bernanke will be testifying on the economic outlook and federal budget situation before the Senate Budget Committee in Washington DC. This will be released at 2am (AEDT) tomorrow morning. Chairman Bernanke's comments tend to be listened to carefully for hints of potential future actions of the central bank. The U.S Federal Reserve is the American equivalent to Australia's Reserve Bank.

The volume of shares traded came in at 1.83 billion today, worth $4.6 billion. 445 shares were up, 517 finished weaker and 374 ended unchanged.

At 4.30pm AEDT on the Sydney Futures Exchange, the ASX24 futures contract is down 0.21 pct or 9 pts to 4247.

Due to daylight savings, most major European markets are now trading between 7pm (AEDT) and 3.30am (AEDT). Futures in Europe are pointing to a slightly weaker start to trade tonight.

Dow Futures are currently higher; indicating that U.S stocks could open a touch stronger tonight. American markets open at 1.30am (AEDT). Due to the Americans going back an hour on November 5 last year, U.S markets will be trading between 1.30am (AEDT) and 8am (AEDT).

Turning to currencies, the Australian dollar (AUD) buys US108 cents (around a six month high) and €82.4 cents. The AUD is currently trading at £68.3 cents. The AUD rose very strongly against a basket of currencies immediately following the RBA's rates decision.

Steven Daghlian, CommSec Market Analyst

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