IG Markets Australian Market Wrap
Across Asia, regional markets are mixed following modestly lower overnight leads from the US and a boost in sentiment across the mining space after Australian PM Gillard reached an agreement with mining companies on a resources tax. The Nikkei 225 is the best performer, up 0.1% while the Hang Seng, Kospi and Shanghai Composite are all down between 0.9% and 1.4%.
In Australia, the ASX 200 finished the session flat at 4238 having traded as a high as 4281 earlier in the session. The initial enthusiasm generated by the revised Minerals Resource Rent Tax (MRRT) waned in afternoon trade as the market played out a tug-of-war between the positive aura created from the new tax and the currently poor global sentiment. The materials sector, which was in the spotlight today, gave up all of its gains to be one of the weakest performers.
Whilst the changes to the MRRT are very positive, the market is clearly focused on the bigger macro picture. At the end of the day, if markets globally are going to continue to make new lows then it'll be very tough for the local market.
It looks like investors are taking money off the table ahead of a crucial non-farm payrolls number this evening and Monday's Independence Day holiday in the US. There's a lot of negative sentiment in the market at the moment so a people are taking the cautious approach and reducing their exposure.
Ahead of tonight's employment report, the market is looking for its first negative headline number in five months with job losses of more than 130,000 expected. What will likely be of more interest to the market is the level of private sector jobs creation, which is predicted to be in the vicinity of 110,000 new jobs.
The last few months data has been artificially skewed by census hiring's which should now have worked their way out of the system. We're also hearing anecdotal evidence that average hours worked are increasing as employers stretch their current workforce instead of increasing headcount.
Given the recent negativity, we believe the market has more than priced in a bearish number and feel that if tonight's data is anything near expectations, we could see some form of a relief rally as markets are generally seen as oversold.
The industrials sector added the most points today, rising 1.6%. Downer EDI finally saw some buying, jumping 8.2% after it once again said it had no plans to raise capital. Macquarie Airports, Leighton Holdings and Qantas were all up between 1.4% and 2.7%.
Qantas was boosted by a broker note from Deutsche Bank, where it upgraded the stock to buy from hold despite cutting its target price to $2.65 from $3.00. The broker said with Qantas trading around the $2.20 level its now in its long-term price to earnings range, both absolutely and relatively. Deutsche believes that despite weakness in the domestic leisure market with discount fares down around 20%, there are signs of "stabilisation and growth in premium traffic both domestically and internationally."
Consumer staples had a good session, rising 0.7% with Goodman Fielder, Wesfarmers and Fosters all higher between 0.9% and 1.9%.
The financial sector erased earlier gains to finish just 0.1 % higher. The fortunes of the big-4 banks were mixed with Westpac, CBA, and NAB posting gains of 0.7%, 0.6% and 0.1% respectively while ANZ was lower by 1%. Macquarie Group continued its recent run of losses, falling another 1.2%.
The materials sector was one of the major detractors today and the key focal point. It lost 0.3% with gold miners Newcrest and Lihir seeing strong selling pressure, finishing the session 3.2% and 3% weaker respectively. Orica fell 0.6% while diversified miners BHP and Rio Tinto finished flat and 0.3% firmer.
This morning's dramatic changes made by the government to the RSPT is a huge win for Australia's biggest industry and should go a long way to easing the markets concerns. The fact that the new PM was willing to sit down with the industry's leaders and thrash out a new deal is positive and acknowledges the importance of a strong mining sector for Australia. This new tax will remove a lot of uncertainty which has clouded the market for some time. It has the potential to spark renewed offshore interest in Australia's mining and energy assets again, with fresh capital inflows likely to be seen. The new minerals resource rent tax will now only cover coal and iron ore, meaning we're likely to see a re-rating of pure play miners that focus on nickel, copper, gold, zinc, uranium and aluminium.
In a comment from RBS Morgans, it listed the biggest beneficiaries of the new mining resources rent tax, in descending order, as ERA, OZ Minerals, Alumina, Newcrest, OM Holdings and Iluka. The broker said there will be no impact on these companies under the MRRT, versus a decline -4% to -26% in net present value impact under the RSPT. For coal miners, RBS sees their NPV impact falling from 5%-10% under the RSPT to less than 5% under the MRRT. For the iron ore miners, the broker believes Fortescue will be the biggest beneficiary. RBS said BHP and Rio Tinto are trading well below their valuations and are cum upgrade.
Elsewhere, the energy sector gave up solid earlier gains to end the session 0.6% lower after crude oil prices slumped nearly 4% overnight on concerns over the outlook for global growth. Across the sector, heavyweight names Santos, Oil Search and Woodside Petroleum all closed weaker between 1.1% and 2.5%, while Caltex and Origin Energy both posted gains of 1.4%.
Ben Potter Research Analyst
IG Markets - CFD trading