IG Markets - Australian Market Wrap Sept. 6, 2010

IG Markets - Australian Market Wrap

Across Asia, regional markets have started the week mostly higher after Friday’s stronger-than-expected US nonfarm payroll numbers further eased concerns about the global economy, boosting risk appetite. The Nikkei 225 is the strongest performer, up 2% while the Hang Seng, Shanghai Composite and Kospi are all up between 0.7% and 1.3%.

In Australia, the ASX 200 finished 0.8% firmer at 4575.5, on its highs of the session. While the market saw broad based gains with all sectors bar technology in positive territory, the biggest percentage gainers were the telecommunications, consumer staples and healthcare sectors. Among the heavyweight sectors, the materials and financial sectors both overcame flat starts to finish 0.8% higher.

Whilst the market was defensively postured, it was certainly positive to see the market starting the week on the front foot, especially noting the absence of any US trade tonight. Investors have no doubt taken comfort from Friday’s stronger-than-expected nonfarm payrolls number, which built on economic momentum established earlier last week.

The 0.8% gain was all the more impressive when you consider the large amount of companies trading ex-dividend today For example, BHP Billiton is currently 12c higher despite trading without its 49.1c dividend.

Gains were also impressive in light of the uncertain election outcome and the growing prospect that the Labour – Green alliance is looking increasingly likely to form a minority government, which would have a negative bias for equities.

In an economic report from Macquarie, it believes ANZ job ads growth and the TD inflation gauge both hint at rising inflationary issues in Australia, although it's nothing too concerning right now. For August, job advertisements rose 2.6% overall, while TD's latest inflation gauge gained 0.2% on-month. The broker thinks the labour market has been one of the key strength points in this economy and believes we are entering one of those points where it could put more pressure on. Macquarie continued, saying it shouldn't be adding to inflation for the second half of the year; that's a 2011 story.

The typically defensive sectors were the big movers today, driving most of the gains. In the healthcare space, Ansell and CSL added 1.9% and 1.2% respectively. The consumer staples sector had a good session, rising 0.9% thanks to gains of 1.4% and 1.8% in Woolworths and Goodman Fielders shares.

The materials sector finished the day with a flurry, closing 0.8% higher after a relatively flat start this morning Bluescope Steel was the top performer, up 4% while the likes of Fortescue Metals Group, Rio Tinto and BHP Billiton were all up between 0.6% and 2.9%.

In a comment from Macquarie Group, it said its proprietary consumer sentiment survey for China suggests Chinese consumers are in a bullish mood. The broker said slowing auto sales and rising TV inventories have some investors worried about consumption growth. However, its measure of buying attitudes towards big-ticket items reached a record high in September. Macquarie added attitudes toward buying assets have bounced back from the tightening-induced lows of April, which dovetails with the recent pickup in property sales. Macquarie believes these demand indicators bolstered both market fundamentals and investor confidence for metals.

Elsewhere, financial names had a strong finish to the day, adding 0.8%. Bendigo & Adelaide Bank was the standout, rising 2.6% while the big four banks were all up between 0.8% and 1.6%. On the downside, Macquarie Group was the biggest loser, declining 4.7% after quantifying its earnings outlook for FY11.

It said it’s expecting 1H net profit to fall around 25% from a year ago, as global market conditions remain weak. After saying at July AGM that 1Q earnings were up slightly on year, Macquarie concedes that uncertain conditions make short-term forecasting very difficult. However, it is still able to forecast FY11 earnings to be broadly in line with last year, should market activity return to more normal levels in 2H. The investment bank reiterated its AGM comments that market conditions are significantly impacting activity levels in its securities, capital, and fixed income currencies and commodities divisions, which were three of the largest contributors to FY10 earnings. In a broker note from Goldman Sachs, it said its put Macquarie’s hold rating and $52.00 price target on review after this morning’s announcement. The broker said 1H guidance equates to a $360 million profit versus consensus of $570 million, while FY11 guidance equates to $1.05 billion versus $1.25 billion consensus. Goldman continued, saying on face value this represents a 16% downgrade to FY11 consensus earnings.

Elsewhere, in an interesting strategy comment from Goldman Sachs, it kept its 5075 year-end target for the S&P/ASX 200, with most key macro valuation indicators remaining attractively priced, particularly relative to bonds and historical measures. The broker also kept its June 2011’s target at 5375 and December 2011 at 5650, adding that near-term risks to these targets remains on the upside. Goldman’s said it is still positive around the dynamics of the domestic economy and expects the key drivers of consumption (household incomes and wealth) and business investment (mining and infrastructure) to improve as we head into 2011.

Ben Potter
Market Strategist
IG Markets

ENDS

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