IG Markets Australian Market Wrap
Across Asia, regional markets have started the week in mixed fashion, digesting a far from convincing US session on Friday as well as the comments from the Group of 20 nations over the weekend. The Shanghai Composite and Nikkei 225 are the worst performers, both down 0.5%. On the upside, the Hang Seng and Kospi are firmer by 0.4% and 0.1% respectively.
In Australia, the ASX 200 shrugged off the flat US close on Friday and the relatively solid sector leads to finished the session 0.7% lower at 4384.5, having traded as low as 4369 earlier in the session. Losses for the day were broad based with all sectors finishing in the red.
There was absolutely nothing happening in the local market today. The only plausible reasons we heard justifying the day's weakness were possible end-of-year tax loss selling as well as some concern over divergent views emanating out of the G-20 meeting.
It appears the US are pushing for further stimulus packages whilst the Europeans are trying to do the right thing now by cutting back on debt levels. Either way, the lack of cohesion seems to be causing some worries, although these concerns are hardly new. All in all though, it's an absolute nothing session with very quiet volumes and no news flow.
We're getting the feeling that sentiment is again turning bearish. The S&P 500 weekly chart is showing the advanced stages of a head and shoulders reversal pattern. Last week's decline looks like it could have formed the right-hand shoulder.
From here, the most bearish scenario would be for the market to break down decisively through the 'neckline' at approximately 1040. If this were to play out, then the downside target could potentially be towards the 850 - 900 level.
Looking at the individual sectors and it was the industrial and material names that detracted most of the points.
The industrial space fell 1.2%, with James Hardies, Brambles, Leighton Holdings and Downer EDI all down between 1.7% and 3.6%, with Brambles the worst. Toll Holdings managed to buck the trend, rising 1.3% despite a negative broker comment.
In a report from Deutsche Bank, it downgraded Toll to 'hold' from 'buy' and cut its target price by 20% to $6.40 from $8.00. Analysis of Australian inventory to sales statistics indicated destocking is still taking place and is likely to put pressure on the domestic operations, thereby delaying Toll's local recovery until a sustained demand recovery is underway. The broker downgraded its EPS forecasts by 5.5% in FY10 and around 8% in each of FY11 and FY12, to a level that is about 5% below market consensus.
Elsewhere among industrial names, Wattyl shares rose 28.2% after it recommended shareholders accept an increased $142 million cash takeover offer at $1.67 per share from US paint and coatings company, Valspar Corp. The offer was nearly 30% above the $1.30/share indicative proposal it received on May 25. While the deal is subject to foreign investment and shareholders' approval in Australia and New Zealand, these would not seem onerous conditions with 19.3% holder Hunter Hall Investment Management already supporting the deal. Wattyl is also the second-largest local paint maker behind Orica, with PPG Industries third, so competition concerns are unlikely to be raised.
Despite firmer offshore leads, material names came under pressure, with the sector losing 0.8% for the session. Rio Tinto and BHP Billiton were down 1.4% and 0.8% respectively while gold miners Lihir Gold and Newcrest Mining fell 0.7% and 0.2%, despite Gold's bounce on Friday evening.
The Australian government is set to announce changes to the proposed mining tax this week, reports The Sydney Morning Herald, without citing sources. The report suggest the government will lift the threshold of profits at which the tax kicks in to 11% from 6%; drop exploration rebates and taxpayer-funded write-offs for failed projects; and change the point during the production process at which the tax is applied. The Australian Financial Review reports the government will offer bigger concessions on the tax, but will leave a final decision until after the upcoming federal election. New Prime Minister Julia Gillard has more room to move than her predecessor, but still faces having to pare back promised initiatives if she gives up too much of the revenue the new tax is slated to deliver.
Financial names chose to ignore stronger leads too, finishing the session 0.7% weaker. Axa topped the list of decliners, losing 2% while the big four banks were all down between 0.1% and 1.1%. QBE Insurance Group and Insurance Australia Group managed to post gains of 0.7% and 0.3%.
The energy sector also saw selling pressure. It lost 0.4% with Whitehaven Coal, Caltex, Origin Energy and Santos all weaker between 0.3% and 3.6%, with Whitehaven the worst.
WorleyParsons managed a gain of 1.6% after it announced an iron ore contract win in Brazil.
In a comment from Deutsche Bank, Caltex was downgraded to 'hold' from 'buy', with its target price cut by 20% to $10.30 from $12.85. This came after its 1H10 guidance for earnings of $140-$160 million were well below the broker's prior forecast of $183 million. The broker said guidance implies 2Q earnings of just $10-$30 million, highlighting the impact of lower production during planned maintenance outages, lower quality premiums and a weaker AUD. Deutsche continued, saying with pressure on regional margins from shut-in capacity returning to production, it sees a more challenging outlook for the company, and cut its 2H10 earnings forecast to $157 million.
Ben Potter Research Analyst
IG Markets - CFD trading