Australian Stock Market Report – Afternoon 8/10/2012

AFTERNOON REPORT
(4.30pm AEST)

The Australian sharemarket lost a little ground for only the second time this week, following some disappointing economic news in China. The All Ordinaries Index (XAO) eased by 0.6 pct or 27.3 pts to 4302.8. Almost all sectors fell with the financial sector holding back the market most significantly.

Despite today's losses, Australian shares have still improved for nine of the past 15 trading sessions. Over the past five days, the XAO has jumped by more than 1.5 pct.

Telstra (TLS), fell 3.09 pct or 12 cents to $3.76 and has had its worst week on the sharemarket since August 2010. TLS's shares have fallen by 6.5 pct over the past five sessions. Yesterday, Australia's largest telco delivered a $3.4 billion profit for the past year, which was a little worse than most expectations. Its healthy dividend of $0.28 a share has been one of the biggest attractions for investors. TLS has maintained at least a $0.28 share payout to shareholders each year, since 2005.

Three of the four major banks (which make up around a quarter of the Australian sharemarket) ended in the red today. Commmonwealth Bank (CBA) slumped by 1.91 pct or $1.09 to $55.94, Westpac (WBC) dropped by 1.67 pct or 40 cents to $23.61, National Bank (NAB) fell 0.94 pct or 24 cents to $25.18 and ANZ Banking Group (ANZ) managed to edge higher by 0.08 pct or 2 cents to $23.84.

The S&P/ASX 200 Materials index ended 0.3 pct lower, following a lower than expected trade surplus in China at 1pm (AEST). Australia exports seven times more to China than to the U.S on average each year. Rio Tinto (RIO) fell 0.72 pct or 41 cents to $56.45, however has had a stellar week and has gained by 8.54 pct over the past five sessions. This is a good sign for the market, with risk appetite seemingly returning for the time being. The world's largest miner, BHP Billiton (BHP) eased by 0.34 pct or 11 cents to $32.69, however jumped 4.44 pct this week.

On the profit reporting front today, casino operator, Crown (CWN) announced a 53 pct rise in profit for the past 12 months to $513.3 million. Crown owns the Burswood Entertainment Complex in Perth and Melbourne's Entertainment Complex.

This week, Bradken (BKN), Leighton Holdings (LEI), Transurban Group (TCL), Cochlear (COH), Computershare (CPU), Rio Tinto (RIO), Newscorp (NWS) and Telstra (TLS) were amongst the larger companies announcing profit for either the past six or 12 months. Results have been mixed, with around half missing market consensus (expectations).

The reporting season will begin to intensify next week with a number of Australia's largest companies issuing their earnings (profit) results. On Monday, services company, UGL, gold miner, Newcrest Mining and JB Hi-Fi will be issuing profit results. On Tuesday, one of Australia's biggest banks, National Australia Bank (NAB) will issue some results, along with Goodman Fielder. On Thursday, AMP, Brambles, the ASX, Wesfarmers (the owner of Coles) and Alumina will release profit. Both oil and gas producer, Santos (STO), and one of Australia's largest insurance companies, QBE Insurance Group (QBE) will cap off the end of the week.

On the economic front today, the Reserve Bank (RBA) released its quarterly statement on monetary policy. The report goes into significant detail on the Australian economy and also contains the central bank's latest growth forecasts for the economy.

As expected, the RBA expects inflation to remain between the target 2-3 pct target range for the next few years, and expects the Australian economy to expand by between 2.5-3 pct over until late 2014.

The central bank has also indicated that the recent strength of the Australian dollar (AUD) is of some concern. The AUD has been trading between US105 cents and around US106 cents for much of the week. However, was significantly weaker just a few months ago. In fact, one AUD was buying just US96 cents at the start of June this year. A stronger currency is great news for Australians travelling offshore, but can be detrimental to the business community. The higher the dollar travels against other currencies, the less competitive our exports become. A stronger dollar also contributes to keeping potential tourists away from Australia.

CommSec's Chief Economist, Craig James said that "The policy stance is clearly slanted towards further rate cuts. Instability in Europe; a high Aussie dollar; or policy mistakes in China are some of the potential triggers for another rate cut. But it is important to note that the Reserve Bank still believes the economy is "operating close to capacity" and that will restrain any inclination to cut rates in the short term. CommSec sees the risk of a rate cut late in the year, but doesn't expect any change in policy settings in the next few months."

Mr James went on to say that "The Reserve Bank remains watchful. There are few signs that the RBA is preparing to cut rates again in the short term, but arguably there are more events likely to result in lower rates than higher rates in the period ahead. The high Aussie dollar has been singled out as a domestic risk. Reading between the lines, we believe that the RBA is warning that if commodity prices ease further but the Aussie dollar remains high, then interest rates could be cut. The Reserve Bank continues to downplay the risks of a shakeout in Europe for the Australian economy. Hopefully consumers and businesses will get the message."

Next week will be quieter on the economic front, with the latest consumer sentiment report for the month of July, one of the highlights along with Wednesday's wage data. A report on the number of new cars sold in July will also be issued. On Thursday, a report on the average wages across a variety of industries will be out.

China, Australia's largest trading partner posted a $25.1 billion trade surplus in July, which was almost $10 billion lower than market expectations. Exports rose by a significantly weaker than expected 1 pct over the month, while an 8 pct improvement was forecast by the market.

It will be quiet on the economic front in Europe tonight, with German CPI (inflation) issued along with French industrial production. The latter is a leading indicator of economic health, as manufacturers of goods tend to be sensitive to developments relating to demand. A slight 0.4 pct rise in production is expected in June, following a close to 2 pct slump in the reading.

No market moving data will be issued in the U.S tonight, with the monthly Federal Budget Balance for July one of the loan releases. This is a breakdown of just how much the U.S government earned (income) and spent (expenses) over the month. For those interested, the report will be available for download on the U.S Department of the Treasury's website tomorrow.

The biggest budget outlay (expense) for the U.S treasury is the Department of Health and Human Services, followed by Social Security expenses and then the Department of Defence-Military Programs. The U.S spends more on its military than the next 20 nations combined.

Volume of shares traded came in at 1.9 billion today, worth just $4.08 billion. 469 shares were up, 434 were weaker and 320 ended unchanged.

At 4.30pm AEST on the Sydney Futures Exchange, the ASX24 futures contract is down 0.84 pct or 36 pts to 4239.

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

U.S futures are also pointing to a lower start to trade 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) has fallen slightly against the greenback. The AUD buys US105.29 cents, is trading at £67.4 pence and €85.6 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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