Australian Stock Market Report – Afternoon 5/1/2012

MARKET CLOSE
(4.30pm AEST)

The Australian sharemarket improved for the second straight day today, with the All Ordinaries Index (XAO) up 0.7 pct or 30.1 pts to 4497.3 and is now trading around nine month highs. The local market outperformed the majority of our peers last month and edged higher by 1 pct in April.

The energy sector was the day's best improver, with the S&P/ASX 200 Energy index up 1.39 pct or 196.4 pts to 14310.1. Australia's second largest oil and gas producer, Woodside Petroleum (WPL) contributed substantially to the gains, up more than 3.5 pct. It has sealed a $2 billion deal to sell part of its stake in an LNG project. WPL has a market capitalisation (number of shares on issue multiplied by share price) of $28 billion, making it the largest company in the sector. WPL shares have jumped by 19 pct this year.

Tomorrow, WPL is holding its Annual General Meeting (AGM). GPT, Alumina and APN News & Media are also holding their annual meetings.

Three of the four major banks ended higher today with National Australia Bank (NAB) the exception after easing by 0.08 pct. Commonwealth Bank (CBA) was the best, up 1.69 pct or 88 cents to $52.85, while Westpac (WBC) and ANZ edged higher by around 0.35 pct. Tomorrow, ANZ Banking Group (ANZ) will be releasing its first half profit results.

Qantas (QAN) rose by 1.22 pct or 2 cents to $1.65 today. An aircraft engineers union said it expects the airline to cut 400 jobs with the closure of a heavy maintenance base in Victoria. QAN shares fell by 8 pct in April.

The mining sector ended mostly higher, with BHP Billiton (BHP) the biggest winner, up 1.18 pct or 42 cents to $35.97.

On the economic front today, all eyes were firmly fixed on the Reserve Bank's (RBA) monthly interest rate meeting. The market was expecting a 0.25 pct cut, taking rates to 4 pct, however rates were cut by 0.5 pct (50 bps) to 3.75 pct. This was the first rate cut in five months (rates were last cut in December 2011). The RBA's interest rate is at its lowest level since February 2010.

A reason that the drop in rates came as a bit of a surprise was the fact that the central bank tends to be a little conservative when it comes to aggressively cutting rates. The last time the RBA cut rates by more than 0.25 pct was back in February 2009, in the midst of the Global Financial Crisis (GFC).

The accompanying statement highlighted that growth in the world economy has been slow, China has moderated, conditions remain difficult in Europe and the U.S is only improving modestly.

Immediately following the rate cut, the Australian dollar (AUD) fell back sharply and the local sharemarket extended its gains. Looking ahead, we expect the RBA to stay put on the interest rate sidelines for the next two months and then cut rates by 25 bps in August.

Commsec's Craig James said that "In short, a tremendous decision. Forget the old stereotype of the Reserve Bank being a super-conservative body. This is a courageous decision by the Reserve Bank. Not only will the super-sized rate cut provide real stimulus, but it will also boost much-needed confidence."

He painted an interesting picture by saying that "The Australian economy has been a lot like a long distance runner. The long expansion has made the economy lean and mean, but it has lost muscle over time. Now is the time to muscle up - with the Reserve Bank implying that the economy can afford to beef up and confront the challenges that lie ahead. Last month the Reserve Bank clearly laid the groundwork for a rate cut. The message was that rates would be cut, provided that inflation remained low. Inflation did its job. And today the Reserve Bank was as good as its word, cutting interest rates by a half a per cent."

The latest manufacturing index was also out today and fell sharply in April, down 5.6 pts to 43.9 (any number below 50.0 means a contraction is taking place). The strong AUD, softer demand, the impending carbon tax and competition from imports are continuing to hurt Australian manufacturing. Both South Australia and Western Australia had improving manufacturing sectors last month however.

Almost all markets in Asia were closed today due to the Labour Day public holiday. Shares in Japan, Australia and New Zealand were open however. New Zealand and Australian markets rose while Japanese equities slumped by 1.8 pct.

It will be quiet in Europe tonight also because most markets in the region will be closed. Shares in the U.K will be trading and the latest British manufacturing PMI will be out at 6.30pm (AEST). Its manufacturing industry is expected to continue to show some signs of improvement.

A number of South American markets will be closed tonight, including shares in Argentina, Brazil, Mexico, Peru and Chile. In the U.S, the latest construction spending, car sales and manufacturing reading will be issued.

Volume of shares traded came in at 2.06 billion today, worth $4.85 billion. 517 shares were up, 507 were weaker and 389 ended unchanged.

At 4.30pm AEST on the Sydney Futures Exchange, the ASX24 futures contract is down 0.11 pct or 5 pts to 4414.

Due to daylight savings, most major European markets are now trading between 5pm (AEST) and 1.30am (AEST). Futures in the U.K are pointing to a slightly lower but largely flat start to trade. Most other markets in Europe will be closed for Labour Day.

Dow Futures are currently a touch higher, indicating that U.S stocks could open in the black 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) is weaker and buys US103.1 cents, falling significantly following the larger than expected rate cut. The AUD is currently trading at £63.6 pence and €77.8 cents. Prior to the RBA announcement, the AUD was buying US104 cents.

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