IG Markets Australian Market Wrap
Across Asia, regional markets are mixed after US markets managed to post gains following stronger-than-expected building approval numbers and a stellar report from Apple. Both the Hang Seng and Kospi are firmer by 0.5%, while the Shanghai Composite and Nikkei 225 are 0.4% and 0.2% weaker respectively.
In Australia, the ASX 200 closed 0.2% firmer at 4412.7, well off its intra-day high of 4435. Once again, positive leads from Wall Street and early session optimism waned and gave way to hesitant trading with investors still trying to get a read on this market. For the session, the materials sector was the best performer with financials also making a positive contribution while the energy, industrials and consumer staples sectors all took points out of the index.
The domestic market drifted south for most of the session, in line with Asian markets and the Australian dollar. We’ve seen a technical rejection of the downtrend line from the April high, which failed last week as well. It’s not a positive sign as it indicates significant selling pressure around these levels.
The US earnings season is continuing to paint a very murky picture. Whilst companies are generally beating on an EPS basis, many have failed to inspire with top line earnings growth. Its revenue growth that the market is focusing on as this is the true indicator of growth and end user demand for goods and services. We need to an improvement on this front before participants begin to believe in the economic recovery.
We’re seeing some of the hardest market conditions to trade over recent years. It’s hard to make rhyme or reason as to how the market might move and react to various events on a daily basis – participants are struggling to get a grip on this market.
Following a night of strong commodity leads, the materials sector was the standout performer today, rising 1%. Amcor, Rio Tinto, Bluescope Steel and BHP Billiton were the biggest advancers, all up between 1.2% and 2.3%. Fortescue Metals Group, Lihir Gold and Newcrest Mining underperformed, all down more than 0.5%.
In a comment from Macquarie Group, it retained it’s outperform rating on BHP, with a $46.00 price target after BHP’s 4Q production report. The broker said that near term, it highlights that the margin squeeze driven destocking process amongst Chinese steel mills has seen an effective buyer's strike in spot iron ore markets. However, post current destocking, Macquarie remains comfortable with the Chinese demand outlook from 4Q10 and into 2011 and, as such, views current valuation support for BHP Billiton as strong.
OZ Minerals had a good session, rising 2.2% following a broker report from Southern Cross Equities. It said OZ Minerals is cheap and strategically vulnerable to takeover. The broker believes a change of control valuation would be worth more than $1.60 and interprets the recent run of positive announcements as "defensive". Southern Cross continues to recommend buying OZ and thinks it's a classic example of a stock priced on top-down macro concerns by equity market short-termists and likely to be re-priced by the longer-dated corporate world. The broker kept its buy recommendation.
Elsewhere, junior gold miner St. Barbara fell -1.5% for the session, despite a report from Deutsche Bank saying it had retained its buy rating and 42 cents price target. The broker said the miners 4Q production details provided growing confidence in St. Barbara's ability to deliver to plan. Deutsche believes St. Barbara has capacity to work toward an annual production target of 500,000 oz in 2014, from 231,000 oz in FY10. In a separate comment from Citigroup, it noted another good quarter for St. Barbara, but said it saw better value for investors seeking gold exposure in Kingsgate and Medusa, but nonetheless rates St. Barbara unchanged at a hold, with target price of 40 cents.
The consumer discretionary sector had a strong session, rising 0.5% thanks to solid gains in US discretionary names. Ten Network topped the group, adding 3.7% after it said its 5-city metropolitan advertising revenue of $402.23 million represented the best-in-market growth on the same period last year of 21.2%.
Elsewhere, the likes of JB HiFi, News Corporation and Fairfax were all up between 1% and 2.1%.
Financial names added significant points, rising 0.3%. Axa was the top gainer, adding 2.3% despite forecasting a fall of 19% in 1H net profit to around $220 million due to deterioration in value of its investments. Among other names, the big four banks were mixed, with National Australia Bank declining 0.8%, while the other three majors were firmer between 0.5% and 0.6%.
On the downside, the consumer staples sector did the most damage, losing 1.3%. Woolworths was the heaviest decliner, down 1.8% after it said fourth-quarter sales figures indicate growth is slowing in its key Australian food and liquor division, up only 3.4% in the quarter; a dramatic decline from the days of reporting 8% - 10% sales growth last year. Woolworths blames lower food inflation and said deflation in produce is continuing. Still, analysts worry rival Coles, owned by Wesfarmers, is taking share from Woolies. While Wesfarmers has yet to report Coles' sales--so it's unclear whether Coles is, in fact, taking share from Woolies—a note from Patersons said it certainly looks that way.
Woolworths' discount department store Big W, saw fourth-quarter sales down 9.3% in the quarter, a year-on-year decline analysts warned of given last year's shoppers had stimulus money to spend. Patersons also said the repositioning strategy at Kmart, also owned by Wesfarmers, could be hurting Big W as well.
Ben Potter Research Analyst
IG Markets - CFD trading