Australian Stock Market Report – Afternoon 9/7/2012

MARKET CLOSE
(4.30pm AEST)

The Australian sharemarket improved for the third time this week, with the All Ordinaries Index (XAO) rising by 0.4 pct or 17.2 pts to 4348.8. The gains over the last few days have helped the local market break a two week losing streak.

Global markets performed strongly last night, thanks in part to impressive economic news in the U.S and the announcement of a new bond buying program by the European Central Bank (ECB). The main goal behind the program is to push down government borrowing costs for some of the weaker Eurozone economies such as Italy and Spain. The ECB is the European equivalent of Australia's Reserve Bank (RBA).

This was the reason why shares in Spain outperformed most other markets, gaining 4.91 pct last night, while Italian equities jumped by 4.31 pct in Milan. Shares in Greece however only edged higher by a modest 0.58 pct, with investors perhaps already giving up on the struggling economy. The Greek government's borrowing costs are currently sitting at over 20 pct.

In the U.S, a report showed that there were 201,000 private sector jobs created in North America last month. This was around 60,000 more than expected. The number of Americans filing to receive unemployment benefits for the first time last week also eased to 365,000. The S&P500 index (an index of the 500 largest listed companies in the U.S) hit its best level since May 2008 at one point. The tech specific NASDAQ index closed at its best level since 2000.

Almost all sectors rose overnight, with the most impressive improvements flowing through to the mining and industrial sectors. Iron ore miner, Fortescue Metals Group (FMG) has been one of the worst performers this week however gained by 11.45 pct or 34 cents to $3.31 today. Despite the gains, FMG shares have slumped by 6.5 pct this week.

The country's second largest mining company, Rio Tinto (RIO) rose by 4.43 pct or $2.22 to $52.38 while the larger BHP Billiton (BHP) gained by 2.04 pct or 64 cents to $31.98.

The major banks ended in the red, with Westpac (WBC) losing 0.84 pct or 20 cents to $23.70, while the other three major banks eased by around 0.2 pct.

Surfwear retailer, Billabong (BBG) received a second takeover bid yesterday, worth $694.5 million from Bain Capital. This matched an existing offer from a private equity firm called TPG. Billabong shares rose by 3.66 pct or 5 cents to $1.41 today, adding to yesterday's 7.48 pct improvement.

Australia's largest airline, Qantas Airways (QAN) was one of the outperformers today, with its shares rising by 5 pct or 6 cents to $1.26. On Thursday, its shares rose by 6.6 pct, following the announcement of a 10-year partnership with the world's largest international airline, Emirates.

Ratings agency Standard & Poor's rebalanced its ASX indices, with discount retailer, JB Hi-Fi (JBH) being removed from the ASX 100 today. JBH shares fell by 0.55% or 5 cents to $9.11 today, which takes the losses for this calendar year to 18.95 pct.

On the economic front today, a report showed that Australia recorded a bigger than expected trade deficit (exports less imports) in July. With Australia being a commodity based economy and prices falling sharply over the past few months, this perhaps shouldn't be a huge surprise. Iron ore (which is our largest commodity export) prices have slumped by around 30 pct over the past two months due to a drop in demand from China.

A $556 million trade deficit was recorded, with exports falling 2.7 pct while imports eased by 1.5 pct. Australia hit a record $33.6 billion trade surplus with China over the year to July while it simultaneously hit a record deficit with the U.S of $18.15 billion.

Australia's strong currency is partly to blame for the trade deficit as it has made our exports less attractive. Our reliance on iron ore is also doing the economy now favours. This resulted in the market pulling back a touch this afternoon, while the Australian dollar has managed to rise, potentially receiving a boost by the ECB's bond buying announcement last night. A large portion of China's exports make their way to the European Union.

CommSec's Chief Economist, Craig James said that "With Australia's trade surplus with China hitting fresh record highs, you would expect that our overall trade position was in good shape. Not so. Australia's trade accounts have been in deficit for the past seven months. So what is going on? Well just as the surplus with China is hitting new highs, the deficit with the US is also hitting new highs. And at the same time the trade accounts with India, Indonesia and Korea aren't as healthy as they were late last year."

Mr James also warned of the negative impact of a Chinese slowdown, saying that "China's dominance of two-way trade with Australia is now just short of the highs maintained by Japan in the late 1980s. While there are plenty of positives for Australia if Chinese economic growth remains strong, there are clear risks if China falters or authorities there make policy mistakes - such as keeping monetary policy too tight for too long."

Economic news this week was mixed, but mostly disappointing. Yesterday, the unemployment rate improved however jobs were still lost. There were 8,800 jobs lost in August while the unemployment rate eased from 5.2 pct to 5.1 pct. The market was expecting the creation of around 11,000 jobs. The reason the jobless rate improved despite a loss in jobs was a fall in the participation rate. This essentially means that the number of people looking for work and in the workforce shrank, effectively resulting in a drop in unemployment. The job losses were all from part-time positions, whereas there were 600 full-time jobs created last month.

On Wednesday, the Australian economy expanded at a slower than expected pace of 0.6 pct in the June quarter (April to June). On Tuesday, the RBA decided to keep rates on hold for the third straight month at 3.5 pct as expected. The market was only factoring in a 15 pct chance of a rate cut this week. On Monday, a report showed that retail spending across the country fell by a greater than expected 0.8 pct in August while the number of job advertisements in newspapers and online fell for the fifth straight month.

Economic news will be light in Europe tonight, with the German and French trade balances both released in addition to Switzerland's unemployment rate. The Swiss jobless rate is expected to remain steady at just 2.9 pct.

Tonight will be the most important session in U.S trade this week, with the official government jobs report due for release. The market is expecting the jobless rate to dip slightly from 8.3 pct to 8.2 pct and for around 128,000 to have been created last month. This is the most important monthly employment report to be issued in the U.S.

Volume of shares traded came in at 1.85 billion today, worth $4.86 billion. 579 shares were up, 349 were weaker and 354 ended unchanged.

At 4.30pm AEST on the Sydney Futures Exchange, the ASX24 futures contract is up 0.32 pct or 14 pts to 4331.

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.

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) improved today and is around US1.5 cents stronger against the greenback than Wednesday's low. The AUD buys US103.3 cents, is trading at £64.78 pence and €81.6 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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