Australian Stock Market Report – Afternoon 9/4/2012

MARKET CLOSE
(4.30pm AEST)

The Australian sharemarket lost ground for the first time this week and for the fifth time in seven sessions today. Global markets were subdued last night due to the closure of U.S markets for Labor Day. In fact, it was one of the least eventful sessions in Europe since December last year. The U.K's FTSE index rose 0.82 pct, Germany's DAX edged higher by 0.6 pct and France's CAC40 gained by 1.19 pct. Locally, the All Ordinaries Index (XAO) slid by 0.6 pct or 26 pts to 4325.6.

Australia's third largest iron ore miner, Fortescue Metals Group (FMG) announced its plan to cut jobs and defer some of its exploration activities due in part to a volatile iron ore market. Iron ore prices have been impacted by lower demand from China and have slumped by around 30 pct over the past two months. FMG announced a slight reduction in production guidance and a $1.6 billion pullback in capital expenditure. FMG shares slumped by 4.21 pct or 15 cents to $3.41.

The country's two biggest mining companies, BHP Billiton (BHP) and Rio Tinto (RIO) both improved today however. BHP rose by 0.48 pct or 15 cents to $31.56 while the smaller RIO gained by 1.04 pct or 52 cents to $50.37.

The four big banks all lost ground, with Westpac (WBC) losing 2.13 pct or 53 cents to $24.32, while ANZ Banking Group (ANZ) fell by 2.01 pct or 50 cents to $24.34. National Australia Bank (NAB) and Commonwealth Bank of Australia (CBA) both fell by 0.79 pct and 0.65 pct respectively.

The retailer ended mostly weaker, with Myer (MYR) falling by 1.83 pct or 3.5 cents to $1.88, while David Jones (DJS) dropped by 0.42 pct or 1 cent to $2.38.

As expected today on the economic front, the Reserve Bank of Australia (RBA) decided to keep rates on hold at 3.5 pct for the third straight month. The market is currently pricing in one rate cut over the next 5 months; however rates could be cut by as much as 1 pct over the next 12 months. The RBA meets on the first Tuesday of each month to make its rates decision (with the exception of January). The bank is in a good position to cut rates, with inflation expected to remain under control for the time being. The Australian dollar (AUD) remains uncomfortably high, while the jobs market is showing some signs of slowing.

CommSec Economist, Savanth Sebastian said that "...one could argue that there are plenty of domestic reasons for the Reserve Bank to be cutting rates in the next couple of months - particularly given the slide in the latest round of retail sales figures and ongoing weakness in job advertisements. However the Reserve Bank still holds to the central view that the longer-term outlook for the Australian economy remains sounds and the latest upgrade to domestic growth forecasts in the monetary policy statement confirmed that view. As such, while rate cuts are still likely it will be a much more considered response."

Looking ahead to the potential date for the next rate cut, Mr Sebastian said that "CommSec believes that more rate cuts are possible over coming months and we have pencilled in another quarter per cent rate cut in November - after the next round of inflation data. Hopefully this rate cut won't be required. That is, European officials act with urgency to stabilise financial markets, the US economic recovery gathers pace, the Chinese economy lifts and Aussie consumer confidence improves providing a catalyst to spend, invest and borrow again. But a lot does have to go right for this scenario to take place."

The beginning of a new month is always a busy time for economists, with a barrage of economic data scheduled for release; this week will be no different. Tomorrow, the June quarter (April to June) economic growth report will be issued and is expected to show around 1 pct growth over the quarter (around 4 pct for the year). Most global economies have already received growth numbers for the quarter. On Thursday, the monthly jobs report will be issued, with the creation of just 11,000 jobs in August expected. Around 10,000 to 15,000 jobs are needed to be created each month for the unemployment rate to remain steady. The jobless rate is likely to remain largely unchanged at around 5.2 pct to 5.3 pct for the month. On Friday, international trade numbers for July are due for issue. A small deficit of around $300 million is a real possibility.

In the region, no major economic news was issued today however yesterday the latest HSBC reading on the health of China's manufacturing sector was disappointing. Most markets across Asia Pacific ended the session lower, with China's Shanghai Composite index, Hong Kong's Hang Seng and South Korea's KOSPI all falling by at least 0.3 pct. Shares in New Zealand were one of the few winners, with the NZX 50 edging higher by a modest 0.19 pct. No economic news of significance are due to release in the region for the rest of the week.

In Europe tonight, Spain's latest change in unemployment will be out, with markets expecting the number of people out of work in the struggling economy to fall by close to 28,000. The monthly construction PMI (Purchasing Managers' Index) will be issued in the U.K at 6.30pm (AEST) tonight and is forecast to show only modest growth within the construction sector. This is a survey of around 170 managers within the construction industry, who are asked amongst other things, to rate the relative level of employment, orders, prices and deliveries.

In the U.S, data will be issued on car and truck sales, on construction spending in addition to a manufacturing reading for the month of August. A reading near 50.0 is expected, indicating a lack of growth.

Volume of shares traded came in at 1.59 billion today, worth $4.41 billion. 398 shares were up, 566 were weaker and 341 ended unchanged.

At 4.30pm AEST on the Sydney Futures Exchange, the ASX24 futures contract is down 0.05 pct or 2 pts to 4311.

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

U.S futures are 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) improved by around US0.5 cent following the RBA's decision to stay put on rates. The AUD buys US102.7 cents, is trading at £64.5 pence and €81.3 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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