Australian Stock Market Report – Afternoon 9/14/2012

MARKET CLOSE
(4.30pm AEST)

The Australian sharemarket improved strongly today following the U.S central bank's decision to stimulate the American economy. The All Ordinaries Index (XAO) rose by 1.2 pct or 50.4 pts to 4410.2. Thanks to today's improvements, the XAO is around 1.4 pct stronger today than this time last week and has had its best single day of trade since 27 July.

Last night, the Dow Jones Industrials Index hit a five-year high while Australian equities are barely at a one-month high.

This week, the market was treading water ahead of the Fed's monetary policy meeting, with the central bank not disappointing with its third round of Quantitative Easing (QE3) announced last night. Essentially, the purpose of QE3 is to boost the U.S economy and to increase confidence in markets. The Fed will be buying US$40 billion worth of bonds each month (Mortgage Backed Securities - MBS). The idea is to bring down mortgage rates, ease corporate bond rates (the borrowing costs for businesses), increase home prices and assist the sharemarket).

There are two things which make this QE program different to the others. Firstly, it is open-ended, which means it is basically unlimited. In the past, the Fed set a dollar limit to its bond buying purchases. One of the ideas behind this is to instil confidence in markets in addition to giving the central bank the flexibility to continue its bond buying until the economic situation has improved.

Secondly, the Fed will be buying Mortgage Backed Securities rather than treasuries. One of the big goals with this is to keep down the borrowing costs for private consumers borrowing money for use in the housing market.

Despite markets initially reacting well to the announcement, the program isn't without its critics. The U.S Presidential elections will be held in just a few months, and this could potentially give the Obama administration unfair advantage (in particular if the sharemarket continues to improve in the U.S this year).

In Australia today, most sectors are trading in the black, with the exception of the defensive healthcare, utility and telco sectors. Telstra (TLS), Australia's sixth biggest company is down 1.04 pct or 4 cents to $3.81.

The S&P/ASX 200 Materials index is up 2.86 pct or 276.7 pts to 9967.6, with Rio Tinto (RIO) up 2.78 pct or $1.53 to $56.58. BHP Billiton (BHP) gained by 1.62 pct or 53 cents to $33.31 while iron ore miner Fortescue Metals (FMG) is in a trading halt at the request of the company. In a statement made to the market this morning, FMG said it remains concerned about rumours and speculation in respect to its bank related facilities. It expects to make an announcement on or before next Tuesday. FMG shares slumped by 13.8 pct yesterday.

The major banks all gained ground, with Westpac (WBC) the best of the big four after rising 1.3 pct or 31 cents to $24.11. Commonwealth Bank of Australia (CBA) gained by 0.47 pct or 26 cents to $55.28, National Australia Bank (NAB) rose by 0.51 pct or 13 cents to $25.41 and ANZ Banking Group (ANZ) edged higher by 0.37 pct or 9 cents to $24.23.

Construction company, Leighton Holdings (LEI) jumped by 4.73 pct or 71 cents to $15.73 today. Its subsidiary, Thiess has won a $154 contract to build a walkway through Sydney's CBD to the Barangaroo development (near Darling Harbour). This walkway will connect Wynyard stations with development. LEI shares are still down 17.3 pct this year however.

No major economic news was issued in Australia or the region today. Looking back however, there were a few reports released in Australia over the week. Wednesday was one of the busier sessions for economic news.

There were three reports out on the economic front on Wednesday, including credit and debit card lending numbers; dwelling starts and a monthly consumer sentiment report.

According to the consumer sentiment survey, Australians are 1.6 pct more confident about the state of their finances and the economy than this time last month. The index rose to 98.2 pts, which is still a negative reading. Any number below 100.0 indicates pessimism, which has been the case for seven straight months now. The younger generation were more downbeat than usual with confidence slumping by 12.9 pct in September for those aged between 18 and 24 years of age.

CommSec Economist, Savanth Sebastian also asked the question why "...Generation Y [is] so glum? In the space of a month, sentiment in the 18-24 age grouping slumped by almost 13 per cent while sentiment was flat or a little bit more upbeat across other age groupings. There is no seasonality in the result to suggest that any one reason was responsible for the more downbeat view. But it may be the ongoing sluggishness in the job market is making it more difficult to find part-time or full-time work. But a large portion of the 18-24 age group attend universities and other education centres, so it is difficult to get a handle on the pessimistic result, however it will be interesting to see if the view is portrayed in coming months."

Keep in mind that confidence has been weak over the past few years, partly due to people spending more on what they don't particularly want to spend money on such as bills, rent and petrol. This leaves them with less in the back pocket to spend on more desirable retail products.

The latest dwelling starts rose by 4.6 pct in the June quarter (April to June). This measures the number of new residential properties that started construction over the quarter. The result was around 2 pct better than market expectations. Keep in mind that starts fell by 7.8 pct between January and March. Over the year there were 138,500 newly built residential buildings that started being built. This was a 2.7 pct fall on the corresponding period last year.

The latest credit card data today showed that there was the biggest fall in credit card debt in 18 years in July. The average credit card balance fell by $69 or 2 pct to $3,299.10 over the month.

CommSec's Chief Economist, Craig James said that "Aussie consumers pat yourselves on the back - you've mastered the plastic fantastic. People are using their credit and debit cards as much as they ever did, but smartly. Aussies are using their credit cards, but paying off the debt by the due date. And we are also smarter with our use of debit cards. Rather than getting cash out at the ATM, we are taking cash out when we go shopping for other things. Withdrawals at ATM are lower than a year ago while cash-out only debit card transactions are up almost 33 per cent on a year ago."

Yesterday, the Reserve Bank (RBA) issued more detailed estimates on job market trends, in addition to the September quarter's Bulletin. The RBA's Bulletin contains speeches, articles and tables of relevant information which was delivered or issued over the quarter.

On Tuesday, the NAB business survey results were issued for August in addition to the latest lending finance report for July. The business confidence survey has shown that sentiment was a little lower in the business community last month. The expectations of weaker commodity prices, a slowdown in China and the delay of big projects in the mining space contributed to the pessimism. Business confidence fell from +3.5 to -2.1 in August. A reading below 0.0 indicates an element of negativity. The survey was conducted between 27 August and 31 August this year. Despite a worsening in confidence, business conditions did improve however are still below long-term averages.

Over the weekend in Europe, the region's Finance Ministers will be meeting to discuss the economy.

In the U.S tonight, consumer sentiment numbers, retail sales, industrial production and consumer prices (inflation) reports will all be issued for the month of August.

Volume of shares traded came in at 1.88 billion today, worth $4.67 billion. 661 shares were up, 299 were weaker and 375 ended unchanged.

At 4.30pm AEST on the Sydney Futures Exchange, the ASX24 futures contract is up 1.01 pct or 44 pts to 4392.2.

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. European investors are yet to react to the Fed's QE3 announcement, since markets in the region closed an hour before the central bank's announcement.

U.S futures are also pointing to a better 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) gained strongly against the greenback following QE3. In fact the AUD now buys US105.8 cents, is trading at £65.3 pence and €81.1 cents. The AUD has gained against most global currencies, while the U.S dollar lost ground against most majors.

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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