Australian Stock Market Report – Afternoon 5/16/2012

MARKET CLOSE
(4.30pm AEST)

The Australian sharemarket lost ground for the second consecutive day, with the All Ordinaries Index (XAO) falling by 2.4 pct or 101.6 pts to 4214.7. Shares have fallen by around 5 pct so far this month and have significantly reduced the gains for the calendar year to just 2.5 pct.

The uncertainty in Europe continues to concern investors worldwide. It is now virtually a certainty that the Greeks will need to return to the polls at some point next month to nominate a Greek President. The Greeks have failed to form a government nine days after their federal elections took place.

Francois Hollande was sworn in as the French President last night but this was not without drama. Mr Hollande's plane headed for Germany was struck by lightning and returned to France for replacement (no one was injured). Mr Hollande's political philosophy differs from Angela Merkel's.

Last night, the Eurozone barely escaped falling into a 'technical' recession. This was largely thanks to Germany, which expanded by a more than expected 0.5 pct. Germany accounts for around 27 pct of the Eurozone economy. France remained flat, while Italy and Spain both contracted. Finland, Austria, Belgium and Slovakia were amongst the only nations to expand in the previous quarter.

The European Finance Ministers met in Brussels last night and indicated that they are ready to discuss some changes to the agreement between Greece and the Eurozone. Prior to this taking place however, a government needs to be formed in Greece.

On the Australian sharemarket today, the utilities ended a touch higher but only make up around 2.5 pct of the Aussie market. Once again, the mining and energy sectors were hit hard while the industrials also felt the pain. Problems in Europe are putting global growth prospects under risk. BHP Billiton (BHP) fell 4.05 pct or $1.37 to $32.49 today while Rio Tinto (RIO) slumped 3.85 pct or $2.32 to $57.99. BHP is now trading at its worst level in three years while RIO is at its cheapest price since October 2009. Australia's third largest iron ore miner, Fortescue Metals (FMG) fell by 5.1 pct or 26 cents to $4.84. FMG has plummeted by more than 12 pct over the past four days.

Westfield (WDC), one of the world's largest shopping mall owners held its Annual General Meeting (AGM) with shareholders today. It said that the first quarter of the year has been broadly as expected by management. WDC shares fell 2.23 pct or 21 cents to $9.22.

WDC's property portfolio is comprised of around 120 shopping centres in a number of countries including the U.K, U.S, New Zealand and Australia.

Building materials company, CSR Limited (CSR) posted a full year net profit of $76.3 million, compared to a $78 million loss in the previous year. Its share price still fell 1.5 pct after CSR did not seem upbeat for the housing construction industry's prospects for the year.

Logistics company, Toll Holdings (TOL) was one of the worst performers of the day, after a significant downgrade to its profit expectations for the second half of the year. TOL shares fell 15.23 pct or 85 cents to $4.73.

Tomorrow, Adelaide Brighton (ABC), ROC Oil Company (ROC) and Ivanhoe Australia (IVA) will all be holding their AGMs. ABC is a supplier of cement and lime to the construction industry, ROC is an oil and gas company with operations in the U.K and the Asia pacific region, while IVA is a minerals exploration and development company with projects in Queensland.

Today was a busy day of economic releases, with both the latest consumer sentiment/confidence report and a quarterly document on Australian wages out this morning.

Consumer sentiment improved for the first time in three months by 0.8 pct, but is still around 8 pct lower than this time last year. This report is released on a monthly basis by Westpac and compiled by conducting a survey of around 1,200 consumers asking a variety of questions on topics such as employment and expected future economic conditions.

Commsec Economist, Savanth Sebastian said that "The Reserve Bank would have hoped that the deep rate cut would have provide a positive shock to confidence and be a catalyst to drive activity but in the short-term it is yet to have the desired effect. And while the latest result doesn't bode well for retailers (who have been facing tough trading conditions for some time, the budget handouts begin in earnest this week, with $110 per child to be distributed to households - a result that should support near term activity."

The Wages Price Index rose by 0.9 pct in the previous quarter as expected. This measures the change in the price both businesses and government pay for labour (not including bonuses). The index is considered to be a leading indicator of consumer inflation (if businesses are paying more for staff, the cost is likely to be passed on to the consumer.)

Mr Sebastian said that "It is the perfect outcome. Wages are still rising at a faster pace than underlying inflation. So the modest real wage gains are serving to support spending. More importantly, inflationary pressures are under control and given that the job market is going sideways, it is likely that growth in wages over the coming year will remain balanced. The Reserve Bank has identified labour costs and productivity to be the two hot button issues to watch. And while wages have been contained there is no doubt that productivity has been weak. However the combination of continued economic growth and a flattening of the job market suggest that productivity may have picked up in recent months. The tame growth of wages keeps the door open for another rate cut. Most likely this would occur at the August Board meeting, but if the European situation was to deteriorate markedly in the next few weeks, an earlier rate cut couldn't be ruled out."

No economic data is scheduled for release in Australia tomorrow.

In Europe tonight, Italy's trade balance will be issued for March at 6pm (AEST), the latest consumer inflation and Germany's 10-year bond auction will also take place.

The British unemployment rate is out and is expected to remain at 8.3 pct while the Bank of England's Governor King will speak and the central bank will also issue an inflation report at 7.30pm (AEST). The European Central Bank's (ECB) President, Mario Draghi will be delivering a speech in Frankfurt.

It will be a busy night in the U.S tonight, with the latest housing starts report out at 10.30pm (AEST) along with building permit numbers. Building starts measure the number of new residential buildings that started being built in April, while permits measure the number of new residential building permits which were issued by government in the previous month. Both reports give the market an idea how the construction sector is fairing (one of the first necessary steps to build a property is to receive a permit (the OK) to do so).

The results of an interesting study carried out by the Program for Public Consultation (PPC), the Stimson Centre and the Center for Public Integrity (CPI) in the U.S have been issued. Each participant in the study was asked what decisions they would make on defence spending if they were a member of U.S Congress. The survey found that 76 pct of participants would cut the national defence budget. 90 pct of Democrats would cut spending while 67 pct of Republican supporters would do the same. The U.S government spends around 30 times more on its military than Australia. For those interested in reading the report, feel free to visit http://www.public-consultation.org/pdf/DefenseBudget_May12_rpt.pdf.

Volume of shares traded came in at 2.23 billion today, worth $5.79 billion. 175 shares were up, 933 were weaker and 311 ended unchanged.

At 4.30pm AEST on the Sydney Futures Exchange, the ASX24 futures contract is down 0.07 pct or 3 pts to 4156.

Due to daylight savings, most major European markets are now trading between 5pm (AEST) and 1.30am (AEST). Stocks are expected to open in the red tonight.

Dow Futures are lower, indicating that U.S stocks could open weaker 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) was trading below parity against the greenback for the duration of the day, and currently buys US98.8 cents. The dollar is trading at its lowest level since 19 December last year. The AUD is currently trading at £61.9 pence and €77.8 cents.

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