ASX Close: Financials lead ASX down

Wednesday 28th October 2009

Markets are all in the red across Asia as a lower-than-expected profit from Canon and higher bad debt charges at National Australia Bank trigger increasing concerns over the pace of economic recovery.

The Korean Kospi and Hang Seng are the heaviest fallers, down 2.7% and 1.7% while the Nikkei and Shanghai Composite are both down 1.5%, respectively.

In Australia, the ASX 200 was under increasing amounts of selling pressure today, ending the session down 1.4% and 4685.1 as investors scurried for the exit doors in the financials, consumer discretionary and materials sectors.

In economic news, Q3 CPI came in at 1% on quarter versus consensus forecasts for 0.9%. Macquarie Group senior economist Brian Redican said "it's just low enough remove the threat of a 50-basis point hike next week at the RBA's November meeting. Still, there are obviously some price pressures flowing through the system. If it wasn't for some sharp falls in food prices (the quarterly rise) would have been higher. The result means RBA won't want to be too complacent but inflation certainly isn't out of control".

More than 65% of today's fall came from the financials space. The financials have rolled over on some pretty decent volume. Investors participating in bank placements over the last six months had been sitting on some stellar gains and were being encouraged to ride the upwards trend. However, with the chorus growing that this current weakness may be a little more sustained and severe than recent pullbacks, it appears the time has come and investors are beginning to book profits.

The selling of the last few days feels different to any of the pullbacks witnessed in recent months. We're starting to see stronger value and volumes on the down days which are encouraging for the bear camp and indicates a level of heightened conviction amongst sellers.

Technical indicators are all pointing to a loss of momentum and, most notably the Dow Jones Transportation index is painting a bearish double top pattern, diverging significantly from the Dow Jones index. We're also hearing increasing amounts of anecdotal evidence from fund managers and traders that their cash levels are the highest they've been in months, indicating professionals are heading for the exit too.

This current bout of market weakness, culminating in today's high conviction selling is quite healthy and may be just what sidelined investors have been looking for. This correction does seem a little different to anything we have seen over the last 4 months and will really test the "buy on dips" philosophy. Should we continue to drift lower, it will be interesting to see at what price level sentiment rebounds and new cash is deployed.

This correction could be the "spring coil" for a run at some of those 5000 point target levels by Christmas.

Turning our attention to the market and it was the financials, materials and consumer discretionary sectors that did the most damage today.

The heavy concentration of financial names in the ASX 200 was detrimental to the performance of the benchmark index with financials being the day's worst performing sector, falling 2.3% and taking 45 points out of the index. As is often the case in a tired and lethargic market, National Australia Bank's better-than-consensus result failed to elicit any excitement and shares where sold off, with losses being magnified by a day of broad based selling of financial stocks. On the session National Australia Bank finished lower by 2.8% while the remainder of the Big 4 were all weaker by between 1.7% and 3.9%, with Commonwealth Bank of Australia faring the worst. Macquarie Bank, which reports of Friday saw its shares lower by 2.4%

Following a weaker set of overnight leads from London and the US, the materials sector lost 1.3% as investors continued to head for the exit door, shunning riskier stocks. Bluescope Steel (-3.5%), Fortescue Metals Group (-2.3%) and Alumina (-1.7%) were the top percentage losers while both BHP Billiton and Rio Tinto detracted significant points, down 1.2% and 1.4%.

The consumer discretionary sector was also significantly weaker, down 1.6% following a worse-than-expected consumer confidence reading out of the US overnight. It showed that the US consumer is still very fragile indeed and that it will take time before it back to pre-crisis levels. Among stocks, Ten Network, Aristocrat Leisure, Crown and Billabong International were the biggest drags, all down between 2.7% and 4.5%.

Macquarie Media Group (halt) announced this morning that it will be following Macquarie Airports in severing its ties with Macquarie Group by internalising tis management. The group will pay Macquarie Group $40.5 million for management rights and plans to simplify the company structure by converting to a single holding company. The group also plans to raise $294 million through a deeply discounted unwritten entitlement offer at $1.55 per stapled security, to help pay down debt.

Elsewhere today, JPMorgan cut WorleyParson's (1%) FY10 net profit forecast by 5% to $354.8 million and FY11 by 6% to reflect recent upgrades to house economists' AUD/USD forecasts.

JPMorgan said "Worley has flagged expected difficult trading conditions in 1H and highlighted the downside risk to current FY10 earnings guidance based on strong AUD. We are yet to see a significant pickup in the capex intentions of Worley's major customers and in the interim, Worley will continue to 'share the pain' with its customers". Also, UBS cut WorleyParsons target to $29 from $30 and FY10-12 net profit forecasts by 3% to $354.1 million, by 2.7% to $447.3 million, and by 2.4% to $511.8 million, respectively, to reflect negative AGM commentary and AUD movement. It said "given movements in the currency since October 1, we would expect this to continue in the 2Q".

Prices are in AUD unless otherwise stated.
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