ASX CLOSE: Materials sector drags the market lower

Monday 7th December 2009

Across Asia, equity markets have begun the week mixed as a stronger US dollar boosted exporters and the better-than-expected jobs report fuelled hopes the US consumer is on the mend. Both the Nikkei 225 and Kospi are higher by 1.4% and 0.5% respectively. On the downside, the Hang Seng is lower by 0.6% and the Shanghai Composite 0.1%.

In Australia, the physical ASX 200 was down 0.6% at 4676.5. The heavily weighed materials, energy and financials weighed on the market the most as the sharp rise in the US dollar sent commodity prices south.

It was always going to be an arm wrestle between weaker materials leads and positive financial leads. This played out early, however the financials rolled over mid morning, removing all support for the market.

The market looks tired. Investors seem happy to lock in profits following a tough year, seemingly wanting to rule a line through 2009 and come back refreshed in the New Year. Having said that, the market doesn't seem overly concerned as share and CFD volumes are light and selling is orderly.

Fears that the USD funded carry trade is about to unwind, is in our view a little premature. While the USD may benefit from a technical bounce in the coming weeks, and on the basis that futures markets are pricing in a chance of rates moving by mid year, investors should remember that the interest rates equation is a relative one.

Australia for example is likely to see several interest rates hikes by mid year, thus not only maintaining but increasing the interest rate differential between the AUD and USD. Also, chances are that if the US are raising rates by mid year so too are many other economies. If that were the case the unwinding of the carry trade would likely be orderly rather than precipitous.

In economic news, Australia's ANZ job ads survey jumped in November by the most since May 2007, driven by strong jobs growth in the materials sector. Job ads in newspapers and on the internet rose 5.2% from October, although they were 34.2% lower than a year earlier.

Turning our attention to the market and it was the materials sector which detracted the most points today. It finished weaker by 1.8% as the sharp rise in the US dollar on Friday sent US dollar denominated commodities lower.

Newcrest Mining and Lihir Gold led the sector south, falling by 6% and 4.8% after gold tumbled more than 4% during Friday trade. Mining giant BHP Billiton was down 1.9% while Alumina and Fortescue Metals Group lost 0.3% and 0.7%. Amcor was the main gainer, rising 1.3%.

In a note from Royal Bank of Scotland, they said the E.U. regulator decision on BHP Billiton, Rio Tinto Pilbara iron ore JV will be dealt with as a production JV rather than a merger, but lack of timeframe for E.U. decision may mean delays. The E.U. regulator will scrutinize the proposal under Article 101, which also means E.U. member states can launch their own investigations. With European steel mills staunchly opposed to production tie-up, this could prove time-consuming. Recent market chatter of Rio Tinto being less interested now in forming JV appears misguided. Rio senior management are convinced of the synergies, pegged at US$10 billion. Also, in a note from UBS they said the decision to assess the proposal as a production JV rather than a merger increases the probability of success. When the news of the deal was announced in September we put the probability of it succeeding at 50%-50%. Now we feel it has increased to 75%-80% (chance of success).

Also of interest was a report from Standard Bank in which they made modest upgrades to their 2010 base metals price forecasts. They note that December is still strong though the market is likely entering a more volatile period, as year-end factors like positioning for commodity index re-weighting period in early January and profit taking weigh. We do not expect too much from 1Q-2010 either, though deep-seated and longer term concerns over inflation and the strength of the dollar should come back to the fore and see price dips bought into again, especially as the global economic recovery should start to pick up pace next year. The short-term picture is more hazy, as long as central banks continue to create liquidity money to keep flowing into commodities. It ups its 2010 copper forecast by 14% to $7,050/ton, aluminium up $20 to $2,210/ton. Nickel is the only metal to be lowered, down 5% to $18,150/ton.

The energy sector dragged on the market too, finishing lower by 1% as the likes of Oil Search, Woodside Petroleum and Santos were all down between 1% and 2%, with Oil Search the worst performer.

Toll Holding and Qantas weighed on the industrials space, finishing the session 3% and 2.2% weaker respectively.

The heavily weighted financials sector also finished the day in the red, down 0.2%. All of the big four were weaker, down between 0.1% and 0.6%, with Westpac Banking Corporation the worst performer. Macquarie Group led the sector lower, down 1%.

Prices are in AUD unless otherwise stated.
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