IG Markets - Australian Market Wrap July 16, 2010

IG Markets - Australian Market Wrap

Across Asia, regional markets are all lower following the mixed bag of leads from the US and disappointing economic data. The Nikkei 225 is the worst performer, down 2.9% while the Shanghai Composite, Kospi and Hang Seng are all down between 0.1% and 1.2%.

In Australia, the ASX 200 closed 0.5% weaker at 4422, having earlier touched an intra-day low of 4413.5. After a weak US session notable for poor manufacturing data, losses for the local market were broad based as investors seemed happy to lighten their exposure heading into the weekend. The materials, energy, financial and consumer staples sectors accounted for most of the day’s losses.

We saw some profit taking ahead of the weekend and a busy earnings schedule this evening. Sentiment still remains fragile, with traders not yet confident enough to hold positions over the weekend. Tonight’s report from the likes of Bank of America, Citigroup, GE and Mattel will offer further insight in the health of corporate America.

Whilst company earnings had expected to be the centre of attention over coming weeks, the softening Chinese and US manufacturing data seen overnight deflected some of the focus. We need to see a synchronized improvement in economic data and company earnings in order to maintain a sustainable rally.

The typically defensive consumer staples sector was the worst performer, down 0.8% with the likes of Wesfarmers, Woolworths and Foster's Group all weaker between 0.7% and 1.4%.

Still among defensives and the healthcare sector also came under pressure. It fell 0.8%, with Sigma Pharmaceutical doing the most damage, down 11.6%. In a comment from Deutsche Bank, it cut Sigma Pharmaceuticals to hold from buy, and slashed its target to 50 cents from 65 after yesterday’s earnings downgrade. DB said weakness in the generics business may lead to further goodwill write downs and may put pressure on debt covenants requiring Sigma to pay creditors $100 million by next March. In a separate note from UBS, it said if a takeover offer from Aspen Pharmacare falls through, Sigma's fortunes will get worse before they improve. Macquarie Group also chipped in, saying the downgrade, forecasting a fall of up to 46% in FY11 net profit, was worse than expected. Macquarie reiterated its view that Sigma should accept Aspen's 55 cents a share offer.

The materials sector was a major detractor, finishing the session 0.6% lower after weak manufacturing data out of the US caused a pause in the recent improvement in investor sentiment. While BHP posted a marginal gain of 0.1%, Rio Tinto and Fortescue Metals saw larger falls, shedding 1.3% and 3.8% respectively while gold miners Newcrest Mining and Lihir Gold both saw losses of more than 2%.

In a report from Macquarie, it upgraded Riversdale Mining to neutral and raised its target price to $11.90 from $8.00 after the company unveiled plans for a capital raising at $9.40 a share. The broker said that although it remains cautious on management's ambitious growth plans, it believes the deal is relatively-well priced on a discounted cash flow (DCF) basis while fully priced based on FY13 p/e multiples. Macquarie would recommend existing shareholders participate in the rights issue. In a separate comment from RBS, the broker cut its target to $11.69 from $14.01, but maintained its positive take on the stock. RBS retained its buy rating and foresees Riversdale becoming an increasingly significant coal stock.

The heavyweight financial sector also gave up 0.3% on the session with three of the four major trading banks weaker between 0.1% and 0.7%. CBA bucked the trend, adding 0.1%. Elsewhere in the space, Macquarie Group fell 1.7% while Axa Asia Pacific shed 1.9%.
Investors are still waiting for real news on the AXA Asia Pacific takeover saga. Suitor, National Australia Bank, has said it's in talks with AXA APH and its biggest shareholder AXA SA over extending the timeline for it to appease the ACCC's concerns on the bid. NAB said in the meantime, agreements between the three remain in place. Investors were probably hoping for more details on the nature of the proposed extension and whether NAB felt it was making any headway in hosing down the regulator's concerns The agreement between the three had been due to expire at midnight last night but was widely expected to be extended to give NAB more time to formulate an acceptable plan for the regulator.

The industrial sector was one of the better performers, finishing the session unchanged. Toll Holdings, Asciano, Qantas and Brambles made up the top of the leader board, all firmer between 0.4% and 1.9%, with Toll the best.

Ben Potter
Market Strategist
IG Markets

ENDS

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