ASX CLOSE: Market rebounds; RBA keeps rates on hold

Tuesday 2nd February 2010

Across Asia, regional markets are mostly positive this Tuesday after US and European manufacturing data came in stronger-than-expected overnight and commodity prices rebounded. The Nikkei 225 is the best performer, up 1.7%, while the Shanghai Composite and Hang Seng are up 0.9% and 0.2% respectively. The Kospi is 0.1% lower.

Locally, the ASX 200 closed on its highs of the day, up 1.8% at 4605.4. It was hardly surprising to see the materials and energy sectors adding the most points after the global rebound overnight.

While today's rebound was positive, it will take more than one day's price action before we can declare the current downtrend as over.

There's no doubt that the bears will try to sell into this rally, whether that's tonight or in coming days. The key will be how easily the bulls roll over and how much lower the bears can drive prices.

We're looking for a higher low as evidence of the bears losing control of the market.

In economic news, the equity market reacted positively this afternoon to the RBA's decision to keep rates on hold, with the ASX 200 adding approximately 0.2% after the release of the announcement.

It seems the central bank could not bring itself to hike for a fourth consecutive time. We feel the RBA has acted prudently in raising rates aggressively, but is smart in now adopting more of a wait-and-see approach.

Comments that stimulus affects are fading and that banks have hiked in excess of the official cash rate have clearly hit home with the RBA.

This will certainly please Australian households and provide a more sustainable platform for consumer spending and hence economic growth moving forward.

Also released today was the business confidence numbers. Australian Business Confidence slid in December from November, but remained above the long run average. NAB business confidence dropped 11 points to 8 as businesses were obviously hit by rising rates and the higher AUD. However, a bounce of 5 points in the labour market sub-index to 7 (its highest level since May 2008) showed managers are busy rehiring again.

In the market, it was a very positive day with all major sectors finishing firmly in the black.

The material space enjoyed a solid rebound after getting pummelled in recent sessions, jumping 3.8% to be the day's best performed sector.

Strong ISM manufacturing data out of the US seemed to add some credibility to last Friday's Q4 GDP reading and helped send commodity prices soaring. The effects were dramatic on the local market with heavyweights BHP and Rio Tinto surging 3.2% and 5.3% respectively while Fortescue Metals also enjoyed the ride to close higher by 6.6%.

Gold miners Lihir Gold and Newcrest Mining welcomed the sharp spike in the gold price back above US$1100 oz to close firmer by 5.2% and 2.5% respectively.

Interestingly, in a research report from Citigroup, Rio Tinto was upgraded to a ‘buy' from ‘hold'. Other Australian miners were upped too after the broker boosted commodity price forecasts on global growth upgrades and strong Chinese imports. Citigroup upped 2010 forecasts for iron ore by 22%, thermal coal by 31%, aluminium by 16%, copper by 15% and zinc by 21%. This boosts earnings for Rio, with their target price upped to $85 from $83. Citi said the miner has undergone a stunning turnaround and may use some of their cash for small acquisitions like Ivanhoe Mines. BHP Billiton was kept at ‘buy' with their price target upped to $50 from $45 and noted a buyback was possible.

Fortescue Metals Group was upped to ‘buy' from ‘hold' with their price target upped to $5.60 from $4.10. Centennial Coal and Macarthur Coal were both upped to ‘buy' from ‘hold' with their targets unchanged at $4.25 and $11.75. Alumina was upped to ‘hold' from ‘sell' with their price target upped to $1.80 from $1.50.

In contrast, a research paper from Goldman Sachs JBWere indicated they believe seaborne iron ore spot prices are drifting lower and that trade may remain subdued in the short-term. With the Chinese Spring Festival just two weeks away and steel prices drifting lower, spot trade in iron ore is unlikely to pick up in the near term as buyers hold off until after the holiday. Spot prices have fallen more than 8% in two weeks.

Energy stocks also had a stellar day, with the sector rising 3.2% on the back of a stronger Crude Oil prices and a better-than-expected result from Exxon Mobil. Woodside Petroleum was the standout, adding 3.9% while Oil Search and WorleyParsons both rose more than 3%.

In a broker report from Merrill Lynch, Woodside Petroleum was upgraded to ‘buy' from ‘neutral' with a $50.96 price target. The broker said although Woodside is expensive relative to peers, with a PE at 22 times, they believe the premium is justified, given the strength of existing LNG customer relationships, good growth track record, and the depth and quality of their conventional gas portfolio. Merrill's believes the company has a consistent pipeline of high-impact exploration wells over the next several months. Combined, the broker sees potential for the company to prove up a multi-TCF (trillion cubic feet) resource pool within the Greater Pluto Area, which could pave the way for Woodside to take a larger equity stake in a second train at Pluto than our current 60% forecast.

Financials were well supported too, finishing higher by 1% but closed off their sessions highs following the RBA announcement. QBE Insurance Group was the best performer, up 2.2% while three of the big four banks were higher by between 0.3% and 1.1%. National Australia Bank bucked the trend, losing 0.6% for the session.

Prices are in AUD unless otherwise stated.
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