ASX CLOSE: Market drifts higher

Thursday 19th November 2009

In Asia, equity markets are mostly lower this afternoon following a flat set of leads from the US and concerns over share-sales in Japan and the outlook for their market. The Kospi and Shanghai Composite are up 1.2% and 0.1% while the Hang Seng is down 0.5% and the Nikkei 225 1.7%.

In Australia, after starting the day higher the ASX 200 drifted south and oscillated either side of the flat line for most of the session. It eventually closed 0.2% higher at 4749.2. The financials and materials sectors added the bulk of the gains while the consumer discretionary and staples sectors detracted significantly.

Leads from the US were flat overnight and that was translated into Australian trade today. We tried to find something interesting and insightful to communicate, but to be honest the market is dead boring at the moment. There was a clear theme of sell financials and buy materials at the beginning of the week but that seems to have subsided for the time being.

There seems to be no order to trade. We've seen a contraction in local market volatility, with investors treading water at the moment, seemingly unsure of what the next catalyst is and where it might come from. There's very little conviction in the market at the moment.

Periods of low volatility are nearly always followed by an increase in volatility, so we're likely to see a pickup. The question is when and which way the market decides to move? Given seasonal factors and the fact we're in an uptrend, you'd have to bullish heading into Christmas.

The market is desperate for some better-than-expected economic data, especially out of the US. The last few economic readings on Wall St have sapped energy from the market.

The financial and materials sectors supported the market today, with the financials the standout. It finished 0.6% higher with Insurance Australia Group leading the way, up 5%. This follows reports yesterday that, once again, QBE Insurance Group is running the numbers on a fresh takeover bid. Elsewhere, the big four banks all returned to the gainers list, up between 0.1% and 1.5% with Commonwealth Bank of Australia leading the way.

Recently, there has been a lot of talk about banks heading lower in the short term, with the argument being that they lack the catalyst to drive them higher given that most of the good news is already priced into the stocks.

However, for those who are prepared to take a medium term view, National Australia Bank trading on 9.8x FY11 earnings and ANZ on 10x could be seen as relatively compelling value. This could be one of the main reasons banks added significant support to our market today.

Elsewhere, the materials sector rose 0.5% with the big gold stocks leading the gainers. Newcrest Mining and Lihir Gold were up 1.6% and 1.1% after gold futures set another record high of US$1153.40 per ounce overnight. Interestingly, market participants have accumulated call options for around 30,000 contracts or 3 million ounces of gold at the US$1200 strike price. With Comex call options expiring on the 23rd November, there is likely to be increased volatility should the gold price rise towards this level as the call originators will try to keep the gold price below the strike.

Also, JPMorgan upgraded Newcrest Mining to ‘overweight' from ‘neutral' after revising its target price methodology for gold stocks. The new methodology will see the setting of target prices at two times net present value. This means Newcrest Mining's target has risen to $40.88 from $35.49. Also, Lihir Gold's target was upped to $3.66 from $3.20 and its ‘overweight' rating maintained.

Amcor (0.7%), BHP Billiton (0.6%) and Alumina (0.3%) also added points.

On the downside, the consumer discretionary sector detracted significant points, losing 0.9% with Aristocrat Leisure, Fairfax Media, JB HiFi and Billabong International all falling by between 1.9% and 2.2%, with Aristocrat the underperformer.

Foster's Group was the major decliner in the consumer staples sector, losing 2.3% while Goodman Fielder managed to rise 0.7% after some positive news from their AGM. It is finally making some progress on the sale of its fats and oils division, much to the applause of the market. Chairman Max Ould told shareholders at the AGM that "the firm is in detailed discussions with one buyer and an announcement on outcome will likely be made shortly". Ould doesn't indicate likely proceeds from sale but says a number of parties have expressed keen interest in the potential acquisition.

Prices are in AUD unless otherwise stated.
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