ASX CLOSE: Market drifts as bear watchers become horse watchers

Tuesday 3rd November 2009

Asian markets are mixed this Tuesday afternoon with the Shanghai Composite trading higher by 1.3%, while the Hang Seng and Kospi are currently weaker by 0.7% and 0.1% respectively. The Japanese market is close for the Culture Day holiday.

In Australia, the "race that stops the nation" saw anaemic volumes traded with the market drifting in the afternoon as bear watchers became horse watchers! The market was initially higher after stronger offshore leads from Wall Street with fund managers doing their buying in the morning, however after midday the market drifted lower to finish the day down 8.9 points or 0.2% at 4531.50.

There did appear to be an element of caution to today's trading, with there still being a large choir of sceptics convinced this recent correction (the Aussie market is down 7.25% from its highs of 4895 reached on 15 October) still has some ways to run.

On a quiet day of trading due to the Melbourne Cup holiday and the Culture Day holiday in Japan, there was little on the news front to definitively guide the market, at least not ahead of the RBA rates decision.

The RBA's decision to raise the cash rate by 25bp to 3.50% was widely anticipated, so it was not surprising to see a fairly muted response from both the equity and currency markets. The specific language that the rate adjustments of October and November "will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead" could possibly suggest the RBA believes it has done enough for the time being, possibly pausing over December and January before reassessing the appropriateness of the cash rate in February.

A broadly weaker USD overnight had positive ramifications for base metals and we saw the materials sector close higher by 0.4%. Heavyweight miners BHP and Rio Tinto posted marginal gains to finish up 0.08% and 0.03% respectively while gold miners found some solid support with gold surging $15 overnight to be trading just north of $1060. Newcrest Mining finished higher by 3.9% while Lihir Gold closed stronger by 4.3% with the latter benefitting from a recent upgrade from UBS. The broker upgraded the stock to a Buy from Neutral and increased its price target to $4 from $3.50 after the company's strong Q3 production report (released last week) which featured reserve upgrades and the declaration of the company's first dividend since 2003.

Industrial names also rebounded from yesterday's sell-off, advancing 0.3%. Top performers in the space included Asciano, Toll Holdings and Downer EDI, which all finished higher between 1.2% and 2%. Dominating news in the sector was confirmation that Leighton Holdings and Macmahon Holdings had renewed their Memorandum of Understanding over their Partnering Relationship which was initially signed in 2007. The partnering arrangement is important to both companies, allowing them to collaborate on, and tender for, large and complex engineering projects. Importantly though, the Standstill Agreement (in which Leighton previously had to seek written consent to increase its stake in Macmahon beyond 19.9%) has been left to lapse. Shares of Leighton and Macmahon finished up 1.4% and 7.5% respectively with the obvious implication being that Leighton now faces fewer impediments to making a full bid for Macmahon.

Financials have seen their share of selling in recent days with the sector down 9% from its current intra day highs two weeks ago. It seems traders are continuing to take profits where they can, however on a two year view the sector still trades at a discount to its long running price/book value average so it can be argued it still offers value.

However today was not about valuations, it was a focus on interest rates and how they would affect the banks with ANZ the first out of the blocks to raise its standard variable rate by 25bp, saying its funding costs remain high. In today's trading, the financial sector again finished weaker by 0.5%. The big four were mixed with CBA closing up 0.7% and the remaining three down between 0.04% and 1.8% with NAB fairing the worst.

After a disastrous listing yesterday for Myer Holdings, which closed at an 8.5% discount to its $4.10 IPO price, shares rebounded slightly today to finish higher by 1.6% at $3.81. Investors now have to make the choice whether to hold on and see if Myer can produce a reasonable Christmas trading period that might warrant it trading on higher multiples, or whether to switch to other retailers such as JB Hi-Fi or Harvey Norman, where the growth prospects over the festive shopping period look a little more robust.

Prices are in AUD unless otherwise stated.
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