ASX CLOSE: Market closes higher; RBA hikes interest rates

Tuesday 6th October 2009

Across Asia, equity markets were mainly positive after stronger overnight leads from the US and strength among commodities. The Nikkei 225 was flat while the Korean Kospi finished down 0.6%. In Hong Kong, the Hang Seng is still trading, currently up 0.7%.

In Australia, the ASX 200 retreated throughout the day and closed 0.1% higher at 4591.6, well off this morning's high of 4641 after the RBA hiked interest rates by 25 basis points to 3.25%, the first G-20 nation to begin unwinding monetary stimulus. The bulk of the gains are coming from the materials, energy and financial sectors.

After posting solid gains during the morning session, equities clearly started to get nervous as the rates decision loomed, giving up a large portion of their advances before trading close to the lows of the day after the mildly surprising rate hike was announced.

Going forward, one would not expect too much of a reaction from equities markets from the RBA's decision. While the timing of today's rate hike may have surprised some investors, markets had undoubtedly baked in the possibility of one to two upward moves before Christmas and may actually see today's hike as confirmation of the underlying strength and resilience of the Australian economy.

In our view, this afternoon's 25 basis points rise from the RBA is both extraordinary and unnecessary, especially given the RBA clearly had ample time and scope to delay rate hikes until after Christmas. With government stimulus clearly past its peak and the RBA suggesting itself there were no present imbalances in the economy, we cannot fathom today's decision especially considering the global rhetoric from the recent G20 meeting that its too early to begin withdrawing stimulus and normalising rates.

The materials sector added the most points today following strong leads in overnight trade. The S&P Basic Materials sector rose 2% with Freeport McMoRan rising 2.2% and Alcoa 4.7%. The CRB Commodity index was 1.3% higher.

In Australia, the gold miners were the major gainers with both Newcrest Mining and Lihir Gold rising 2.4% and 2.8%. Among the diversified miners, Rio Tinto was up 1.5% and BHP Billiton finished the session 0.9% higher.

The energy sector was also higher following overnight gains in Crude Oil prices. It is currently trading at $70.61 per barrel. In the sector, WorleyParsons was the biggest gainer, finishing 2.6% higher. Also adding points were Origin Energy (1.8%), Oil Search (1.6%) and Santos (0.9%).

WorleyParsons this morning announced it had been awarded the contract to manage the prefeasibility study for Flinders Mines Limited's Pilbara Iron Ore Project in WA.

Despite US financials being the standout performer during the Wall Street session, Australian financial stocks finished the day relatively flat with earlier gains tempered by the RBA's mildly surprising decision to raise the cash rate by 25bps to 3.25%. On the session, the big four banks were mixed with Westpac and ANZ finishing in positive territory by 2.1% and 0.9% respectively, while NAB and CBA both finished marginally in the red. Looking beyond the near term, normalising interest rates and a positively sloping yield curve should support bank earnings. Macquarie Bank was a clear beneficiary of the strong session from US financials advancing 2%.

Citigroup downgraded both ANZ and Westpac Banking Corporation to ‘hold' from ‘buy' following recent share price appreciation. It said "with both stocks up 30% or more in the last quarter, we believe these banks are approaching fair value on a range of stock selection metrics. It said there appears to more valuation upside for Commonwealth Bank of Australia and National Australia Bank and maintains its ‘buy' rating".

Elsewhere in the market, Royal Bank of Scotland upped Ansell's (flat) target to $11.73 from $11.12 on the back of higher earnings estimates due to USD weakness against the AUD and completion of its buyback. It said "the recent AUD/USD mitigates the effect of our earnings upgrades but Ansell continues to benefit from the economic recovery mostly in the occupational unit".

Also, GrainCorp this morning announced it had purchased United Malt Holdings for $757 million. The deal will be funded by debt and a fully underwritten equity raising. The purchase will double the size of the company with Chairman Don Taylor saying "it will diversify and stabilise the earnings base, which is always subject to vagaries of drought".

Prices are in AUD unless otherwise stated.
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