Australian Stock Market Report – Afternoon 6/5/2012

MARKET CLOSE
(4.30pm AEST)

The optimists out there often say things such as "It might be stormy now, but the rain won't last forever". Those words rang true for markets (not so much the actual weather) today in Sydney. Shares rose for the first time in five days, with the All Ordinaries Index (XAO) up 1.5 pct or 59 pts to 4092.4. The market ended close to its best level of the day and improved in the second half of trade (following the central bank's rate cut).

Australia's largest airline, Qantas (QAN) hit an all-time low, with its shares down 18.66 pct or 26.5 cents to $1.15. This is after the airline said it expects a drop of up to 91 pct in its full year profit (underlying profit). Its international business has been holding the airline back and could record a loss of more than $450 million for the year to June. This would be more than double the $216 million loss recorded in 2011. QAN shares have slumped by around 30 pct over the past three months and plummeted by 42 pct in 2011.

All other sectors with the exception of the telcos did well today. Australia's second largest miner, Rio Tinto (RIO) gained 1.61 pct or 85 cents to $53.75 while the larger BHP Billiton (BHP) rose by 1.33 pct or 41 cents to $31.16.

The big four banks extended their gains today, with National Australia Bank (NAB) up 2.36 pct or 52 cents to $22.55. ANZ Banking Group (ANZ) rose 2.16 pct or 45 cents to $21.32, while both Westpac (WBC) and Commonwealth Bank (CBA) gained just under 2 pct.

Rail freight operator, QR National (QRN) rose 4.83 pct or 16 cents to $3.47 today after announcing around 600 jobs cuts as part of its restructure to improve efficiency. It said that most redundancies will not be forced. QRN has a workforce of around 3500.

The Reserve Bank of Australia (RBA) decided to cut interest rates by 25bps (0.25 pct) today as expected. The market was factoring in a 50/50 chance of a 50bps cut. The RBA was content to remain a little conservative and stay in a 'wait and see' mode prior to using up all its ammunition. Interest rates are currently at their lowest level since December 2009.

In under a fortnight, the Greek elections will take place and is one of the major events investor focus will turn to.

Commsec's Chief Economist Craig James today said that "This is a smart decision. This is an appropriate decision. And this is a decision that deserves support across all areas of the Australian community. This is where the Reserve Bank officials earn their money. Sometimes it is abundantly clear what should be done with interest rates. Other times - such as now - it gets a lot harder. In other words, monetary policy is more art, than science. The Reserve Bank could have left rates unchanged. But there would have been more risks associated with that decision and potentially more regrets. The economy is soft, inflation is low and the global economy has all manner of risks. The Reserve Bank may have cut rates by half a per cent. But there were risks in this strategy as well - the Bank doesn't want to use up all its ammunition."

No major economic data was issued in the region today, however most markets ended higher. Shares in New Zealand fell by around 1 pct (playing catch-up as markets were closed due to a public holiday yesterday).

The U.K markets will be closed for a second straight day today due to a public holiday. There will be a few pieces of economic data issued over the next few hours. The latest Services PMI in Italy and the broader Eurozone tonight, with both expected to remain weak. A number below 50.0 indicates worsening conditions in businesses. Retail sales for the month of April will be issued for the month of April at 7pm (AEST) and are expected to ease by 0.1 pct. German factory orders are released at 8pm (AEST) and the market is forecasting a 0.9 pct contraction. This measures the change in the total value of new purchase orders placed with manufacturers. The more orders placed with manufacturers, the more activity expected by the sector in the future.

In the U.S tonight, the latest ISM Non-Manufacturing PMI numbers will be out and are a leading indicator of economic health. Businesses tend to be quite quick to react to market conditions. The Bank of Canada meets tonight to make a decision on interest rates and is likely to stay steady at 1 pct for the 14th straight month.

Tomorrow in Australia, the March quarter (January to March) growth figures (GDP) will be out and market expectations are pointing to modest growth of around 0.5 pct.

Volume of shares traded came in at 1.6 billion today, worth $4.25 billion. 557 shares were up, 390 were weaker and 369 ended unchanged.

At 4.30pm AEST on the Sydney Futures Exchange, the ASX24 futures contract is down 0.44 pct or 18 pts to 4036.

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

U.S futures are pointing to a better start 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) buys US97.5 cents despite a surge following the 25 bps cut in rates (the market was factoring in a 50/50 chance of a more significant 50 bps cut). The AUD is trading at £63.5 pence and €78.3 cents.

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