ASX CLOSE: Widespread sell-off drags market lower

Friday 27th November 2009

Across Asia, equity markets are all lower following the shock news overnight that Dubai had asked creditors of ports operator Dubai World for a 6-month standstill on repayments on debts worth about US$60 billion. After falling 3.6% yesterday, the Shanghai Composite is lower by 1.9% today, the best relative performer of the region. Elsewhere, the Nikkei 225 is down 2.9% while the Hang Seng has lost 3.5% and the Kospi 4%.

In Australia, the ASX 200 closed 2.9% lower at 4572.1, near the lows of the day. We saw widespread selling on large volumes as investors headed for the exit door. However, with relatively little actual exposure to Dubai, especially among the banks, we were mainly down in sympathy. The financials, industrials and materials detracted the bulk of the points.

At the end of the day, we're talking about Dubai here. Yes, some of the big European and US banks are likely to have exposure to it but its unlikely to ‘sink the boat' so to speak, especially given what financials have been through over the last 18 months.

It's not like this has just suddenly popped up either. Credit default swaps for Dubai have risen more than 80% in the last month so there have been plenty of warning signs for creditors.

The issue has certainly put some risk back into the market and in turn, seriously wounded investors' risk appetites. In the last 24-hours, we've seen a lot of money flow out of the risk trades with emerging markets and high beta currency plays like the AUD and CAD coming under pressure.

However, it's very hard to judge how this situation will play out. Was last night's volatility exaggerated by a lack of market liquidity thanks to Thanksgiving Day or was it real? Tonight's European trade and the half session on Wall St will be absolutely crucial in determining market sentiment and whether or not this is just a hiccup in the trend higher or the beginning of something more sinister.

Turning our attention to the markets and the selling was broad based today, with all sectors finishing the session firmly in the red. As expected, it was the financials and materials sectors which weighed the most.

The financials sector was down 3.3% with Macquarie Group leading the way, slumping 5.1%. Bendigo Adelaide Bank was not too far behind, dropping 4.1% while the big four banks were all down between 3.6% and 4%, with National Australia Bank fairing the worst.

The materials sector slumped 3.3% after commodities sold off heavily overnight. Orica and BHP Billiton were the biggest fallers, down 4.6% and 3.4% respectively while the likes of Fortescue Metals Group and Rio Tinto fell 3.1% and 3%. The gold miners also saw some selling pressure with Newcrest Mining down 2.8% and Lihir Gold 2.7%, despite gold being relatively well supported.

Amcor was the best relative performer, only down 1.5% thanks to a broker note from JPMorgan.

JPMorgan maintained its ‘overweight' recommendation for Amcor, with a price target of $6.72 while in a report from Credit Suisse, the broker retained its ‘outperform' rating and $6.50 price target. The broker noted that Amcor said it may sell a European flexible packaging plant to satisfy EU regulator's concerns about purchase of some of Rio Tinto's Alcan Packaging assets. The plant, one of Amcor's portfolio of 75 has annual sales of US$100 million, or about 2% of combined Amcor and Alcan's European sales of US$4.8 billion, the broker says.

In the energy (-3%) space, Caltex and WorleyParsons led the pack south, down 3.7% and 3.4% while the heavily weighted Woodside Petroleum and Santos were off 2.8% and 3.2%.

United Group, Qantas and Leighton Holding's led the industrials lower, all down between 4% and 5.2%. Of the ASX 200, Leighton Holding's probably has the most exposure to the Dubai area so it will be interesting to see how they trade over the next few days.

The typically defensive sectors like the telecommunications (-0.6%), utilities (-1.5%) and consumer staples (-1.6%) all outperformed the market on a relative basis. Foster's Group was the best relative performer, falling 0.7% following an upgrade from JPMorgan.

In a report from JPMorgan, the broker upgraded Foster's Group to ‘neutral' from ‘underweight' and increased its price target to $5.90 from $5.60, citing the beverage maker's successful appeal in a tax assessment case and a stronger outlook for beer. The broker still believes there are considerable downside risks to consensus forecasts considering the ongoing troubles in the wine industry, which has been struggling under the weight of oversupply issues. The analyst notes improvements in beer market volume growth helps, but warns the gap between premium and mainstream beer pricing in Australia is shrinking while consensus forecasts for certain wine earnings metrics have yet to be adjusted.

Prices are in AUD unless otherwise stated.
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