IG Markets: Australian Market Wrap

Press Release – IG Markets

Across Asia, regional markets are all lower as traders cautiously positioned themselves ahead of next week’s crucial FOMC data. The Nikkei 225 is down heavily, lower by 1.6% as a stronger yen weighed on the market and traders were happy on the sidelines …IG Markets Australian Market Wrap

Across Asia, regional markets are all lower as traders cautiously positioned themselves ahead of next week’s crucial FOMC data. The Nikkei 225 is down heavily, lower by 1.6% as a stronger yen weighed on the market and traders were happy on the sidelines ahead of a swag of earnings after the closing bell. Elsewhere, the Hang Seng, Kospi and Shanghai Composite were weaker between 0.7% and 1.5%.

Locally, the Australian market saw a steady stream of profit taking today as participants positioned themselves for an ‘unofficial’ long weekend and next week’s heavy data load. The ASX 200 finished 0.5% lower at 4661, just off its session low of 4655. The consumer staples and industrial sectors did the bulk of the damage while energy and consumer discretionary names also came under pressure. Heavyweight financial and material names finished in the red, but outperformed on a relative basis.

Trade across the region was dominated by position-squaring ahead of next week’s crucial data. A lot of participants have profits on the table; it looks like they’re banking these and are happy to sit on their hands, taking a wait-and-see approach into next week.

Markets have rallied significantly recently on QE expectations; it certainly looks like participants have priced a lot of the QE in, potentially leaving the market vulnerable to a ‘sell on fact’ scenario. Either way, next week’s events are going to be absolutely crucial in determining the likely direction for global markets in the short to medium-term.

In terms of foreign exchange, we’ve again seen indecision amongst currency traders who are speculating on the outcome of next week’s data releases. The USD lost ground overnight against all major currencies as traders increased their QE expectations after the Fed asked bond dealers how asset purchases would influence yields; this potentially suggests they may be still open to a large scale purchase program on the 3rd November. However, during Asian trade we’ve seen a reversal of this trend, with the USD rallying against all major currencies except the Yen.

Interestingly, comments from finance minister Noda suggesting the BOJ will intervene at any stage did little to stem the buying, pushing the Yen to 80.52, 11 pips from the recent low and only 77 pips or 1% from an all time low. The Australian dollar has fared the worst during the Asian session, losing ground against all currencies but most notably the Yen where traders sold the highest yielding currency in a classic case of risk aversion before the big FOMC decision.

It is interesting to see that the BOJ has moved its November 15-16 meeting to November 4-5, which could be a possible precursor to further action by the Central Bank in response to the FOMC outcome

On equity markets, the consumer staples sector was the biggest decliner, losing 1%. Fosters fell 2.3% after it said it had not been in discussions with private equity firms since the last approach was rejected. Wesfarmers and Coca-Cola Amatil were also lower, down more than 1.2%.

Downer EDI, Toll Holdings, Brambles and Qantas were the worst performers among industrial names, all weaker between 1.4% and 1.9%. The sector fell 0.7% for the session.

The energy sector was another significant decliner, falling 0.9%. Origin Energy, Macarthur Coal, Caltex and Woodside Petroleum were the major detractors, all lower by more than 1.1%. On the upside, Whitehaven Coal was the standout, surging 8.9% after announcing it was in talks with outside parties about a tie-up.

Whitehaven has been the subject of speculation for some time, focused on a joint bid by biggest shareholder First Reserve Corp. and Alpha Natural Resources; the stock is up 25% since August, when takeover speculation first aired. At a time when few acquisition targets are left in the fizzy Australian coal space, the company is the third-largest independent pure coal play on the ASX after New Hope and Macarthur Coal, whose strategic stakes make it all but takeover-immune. Board approval will all but guarantee a deal: First Reserve plus MD Tony Haggarty and non-exec Hans Mende control 60% of company.

The heavily-weighted financial and materials sector also fell, but managed to outperform on a relative basis. They were 0.5% and 0.2% weaker respectively.

Among financials, it was all about Macquarie Group. It surged 4.8% after the investment bank reiterated its full-year guidance for a flat fiscal 2011 compared with the prior year Analysts, according to Factset data, were collectively forecasting full-year profit would fall 9.5% on year. Management said activity in September and October, while improving, is still below normal; full-year guidance is still contingent on the market returning to “more normal levels”. 1H net profit was down 16% on year at $403 million, well ahead of consensus forecasts of $366 million. Macquarie shares are down more than 30% in the past year. Management said market conditions are impacting the fixed income, currencies and commodities business; the biggest contributor to earnings last year.

Elsewhere, the big four banks were mixed, with ANZ and NAB rising 0.3% and 0.5% while Westpac and CBA declined 1.1% and 0.9%.

Gold miner Newcrest topped the material names, adding 1.6% while Fortescue attracted some buyers following recent weakness, rising 1.3%. On the downside, Bluescope Steel, Rio Tinto and Alumina were all down between 1% and 1.7%.

In a broker note from Citigroup, it said Rio Tinto’s expansion of Pilbara operations won’t come cheap after a roundtable meeting with Rio’s Iron Ore CEO Sam Walsh. The broker estimates the planned expansion to 333 million tons/year capacity to cost US$130/ton due to the strong AUD/USD and cost pressures in the industry, equating to capex of US$15 billion vs US$12 billion previously forecast. Citi expects major expansions of Brockman 4, Western Turner Syncline, and Nammuldi mines to be announced 2011, taking mines from current production of 33 million tons/year to 84 million tons/year together; work will require peak construction workforce of 7,000. The broker said that with Rio’s and other iron ore projects competing with LNG for skilled labor there will likely be substantial pressure on capex. Even so, Sam Walsh was bullish on iron ore demand in 2011, with the company fully contracted already and Indian exports declining. Given this, Citi rates the stock a buy with $100 target.

Ben Potter
Market Strategist
IG Markets

Content Sourced from scoop.co.nz
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