ASX CLOSE: Another negative day for the Australian market

Tuesday 8th December 2009

Equity markets are weak across Asia following an uninspiring set of leads from the US after Ben Bernanke said the US still faces formidable headwinds in its recovery. The Shanghai Composite is the biggest decliner, down 1.9% while the Hang Seng, Nikkei 225 and Kospi are all lower by 0.5%, 0.6% and 0.7%.

In Australia, the ASX 200 finished 0.1% weaker at 4670.6 after trading as high as 4697.2 earlier in the day. The financials sector held the market back as poor leads from their US counterparts weighed.

Another day of lethargic trading confirmed our view that the market is out of gas and "rolling in neutral" towards the Christmas break. Anaemic volumes also backup this view.

The materials sector, which was thought as offering the impetus for a Santa Clause rally seems to have become road blocked by speculation (warranted or otherwise) that rates may be on the move in the US by mid year, in turn driving the US dollar higher and heading off any advances in commodity prices.

Gold was always going to come under a bit of selling pressure when speculation intensified that US rates were heading up. The non-farm payrolls number really bought forward these expectations although Bernanke did his best to dispel these concerns in his speech last night.

The bottom line is - rates will be exceptionally low for an extended period. The Fed has said this countless times. What constitutes "exceptionally low" and an "extended period" is subject to great debate.

By historical standards, anything less than 1% would fit the definition of exceptionally low. As to a timeframe, well that's anyone's guess. Could be 6 months, 12 months or 18 months, no one really knows and anyone who says they do is lying.

When we do start to get stronger confirmation rate hikes in the US are imminent, we will see the greenback strengthen and gold sell off - that you can bet on.

In economic news, Australia's business confidence rose to a 7-year high in November, boding well for 2010's outlook and indicating that the economic recovery here is only just beginning. National Australia Bank's business confidence index jumped three points to 19 while business conditions fell two points to a reading of 10.

Turning our attention to the market and it was another negative day for the Australian market.

The health care sector was one of the biggest percentage fallers today, losing 1% as the likes of Cochlear, Ansell and Sigma Pharmaceuticals were all down between 2% and 3%.

In a report from Deutsche Bank, the broker kept its ‘buy' recommendation and $12 price target for Ansell despite the 20% rise in latex prices in the past month because of heavy rainfall in key growing regions. Despite the recent rise, it estimates Ansell's 1H latex cost will be about 30% lower than that of a year earlier and the FY cost is likely to be lower than that of FY09 unless prices rise by a further 75% by March. Latex prices fell dramatically last FY because of lower demand due to the global economic slowdown. If Ansell is unable to increase glove prices, each 10% increase in the average latex price would cut EPS by about 8%. However, global economic demand is a major driver of latex price, implying a sustained increase will likely be associated with a recovery in the global economy, which would boost occupational glove sales.

The financials sector was the biggest detractor in terms of index points. It finished 0.3% lower as the likes of Suncorp - Metway and Axa Asia Pacific led the group south, closing down 2.1% and 1.5% respectively. The big four banks were all in the red, finishing lower by between 0.1% and 1.3%, with Commonwealth Bank of Australia the worst performer. On the upside, QBE Insurance Group and Westfield Group managed to post gains of 1.1% and 0.9%.

Asciano was a standout in the industrials sector, rising 3.9% after the group signed its fifth Queensland coal customer. It was also buoyed by a broker note from UBS, in which they increased Asciano's target price by 11% to $2 from $1.80 after forecasting higher growth rates for its Queensland coal haulage earnings, which are now expected to grow from EBITDA of $110 million in FY11 to $285 million in FY15 as annual volumes increase to 78 million tons from 27 million tons. It expects strong service delivery from Pacific National to help it continue to take market share from lagging service of Queensland Rail as it implements 20%-30% price rises on contract renewals. The broker believes Xstrata is the most likely of the major miners to contract more volumes with Pacific National, while it also expects Pacific National to win a fair share of planned port expansion projects.

On the upside, the materials sector outperformed for the session posting a 0.5% rise. BHP Billiton was the top performer, adding 1.1% while Amcor and Rio Tinto rose 0.5% and 0.4%.

In an interesting broker note from Credit Suisse, they said they are sceptical about the possibility of a BHP Billiton takeover offer for Woodside, which has been speculated as a possibility by market participants for years. While strategic benefits are inherent, particularly with Woodside short of gas for Pluto LNG expansion, financial benefits aren't compelling. It estimates BHP would have to bid $65 per Woodside Petroleum share, which would require BHP to find US$21 billion additional debt. It believes such an offer would convert to a BHP Billiton EPS dilution of about 8-11% until FY15. It also notes that Woodside's growth projects of Pluto, Browse and Sunrise could cost as much as US$20 billion-US$25 billion to build over 2011-2016.

Prices are in AUD unless otherwise stated.
IG Markets Ltd, Australian Financial Service Licence No. 220440. ABN 84 099 019 851.
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