IG Markets - Australian Market Wrap Sept. 13, 2010

IG Markets - Australian Market Wrap

Across Asia, regional markets have all started the week with strong gains as better-than-expected Chinese data spurred optimism over the global economic recovery. The Hang Seng is the top performer, up 2% while the Nikkei 225, Kospi and Shanghai Composite are all up between 0.9% and 1%.

In Australia, the ASX 200 closed 1.2% firmer at 4614.9, just off earlier highs of 4621. Gains were broad based following the impressive Chinese numbers released on Saturday. The heavily-weighted materials, financials and energy sectors added most of the points while the typically defensive sectors underperformed.

The market has taken a great deal of confidence and comfort from the weekend’s China data. It’s really starting to look like the path of least resistance is up. Everybody has been positioned short for another horrendous September. At the moment, it’s looking very positive indeed after the best start to September since 1939 for the S&P 500.

With a heavy week of economics due in the US, this coming week will be very important. Should the improving trend in economic data continue, then we’re likely to see a lot of traders frantically covering their short positions and re-positioning on the long side, which will create an enormous amount of upside momentum.

Sentiment is still very bearish, which supports the bullish case. Also, the AUD is looking very strong and threatening to break out above previous resistance through the 0.94 level. It been a reliable leading indicator for the ASX 200 this year so a break here could certainly propel the equity market toward a new trading range of 4600 – 5000. With the resilience of the Chinese economy shining through, a rally is likely to be led by commodities and resource stocks, as well as furious short covering in the financial sector.

In economic news, a research note from ICAP said that while it’s not a data heavy week for Australia, there's still some important policy feeds coming through with NAB's business confidence survey due tomorrow and Westpac's consumer confidence survey due Wednesday. ICAP believes the RBA knows it has to hike again, but is a little unsure as to the timing. ICAP thinks the RBA is probably unsure about some of the data; adding the RBA is likely not quite accepting household consumption has been solid, as 2Q GDP report suggested. ICAP said it suspects the caution will be temporary as data on the consumer and anecdotes eventually provide a more compelling picture of strength. ICAP notes that jobs growth in 3Q is currently tracking at the same pace as the +27,000 per month rate in 2Q, which was a very strong quarter for household consumption.

Turning to the market and the materials sector was one of the top performers, rising 1.5%. Bluescope Steel topped the list, adding 4.7% while Fortescue Metals Group, Alumina, BHP Billiton and Rio Tinto were all up between 1.4% and 3.3%.

Sundance Resources had another stellar day, surging 25%. Sundance rose strongly last week after announcing a rail MOU with China-Africa Construction allowing the discussion of a 478 kilometer train line to bring ore from Sundace’s Mbalam project to Cameroon's coast at Lolabe port The stock is still a bet on proposed talks producing a deal.

In a note from Commsec, it said the strong Chinese economy will continue to underpin demand for resources, including base metals. China's economy strengthened in August with production, retail trade, inflation and money supply all growing at stronger annual rates in August, suggesting authorities will need to lift rates to slow their economy. The broker believes the continued strength of the Chinese economy is of great encouragement to investors across the globe and put simply means more demand for resources.

The financial sector jumped as well, up 1.5%. Macquarie Group was the top performer, up 2.4% while the big four banks were all stronger between 1.3% and 2.2%, with NAB the best. Axa rose 2.4%.

In a broker comment from Citigroup said AXA SA could help AMP boost its bid for AXA APH by paying more for the Asian business given the stronger growth in the value of that unit vs the Australia/NZ business, since the original bid. Besides accepting status quo, the broker believes other options for AXA SA include making an offer for the whole company. Citigroup also believes that AXA SA could find another partner who could afford the Australian business and be unlikely to run into regulatory concerns; or it could seek a de-merger of AXA APH, with the Australian/NZ business remaining separately listed and AXA SA acquiring the Asian businesses.

The energy sector added 1.4% thanks to surging oil prices on Friday evening. Oil Search, Whitehaven Coal, Santos, Origin and Woodside Petroleum were all up between 1% and 3.7%.

Elsewhere, the consumer discretionary and industrial sectors both rose 1% while on the downside, it was the typically defensive healthcare and telecommunications sector that underperformed, both finishing lower by 0.2%.

Ben Potter
Market Strategist
IG Markets

ENDS

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