ASX CLOSE: Markets lower; materials sector does most damage

Tuesday 24th November 2009

Across Asia, the Shanghai Composite is the only market in the black as concerns over further Japanese bank share sales weighed on the market and early gains in Australia reversed on the back of falling commodity prices. The Nikkei 225 is the biggest drag, down 1% while the Kospi and Hang Seng are weaker by 0.8% and 0.2% respectively.

Down under in Australia, the ASX 200 finished 0.7% lower at 4685 after starting the day firmly in the black. Positive leads from the US on the back of better-than-expected existing home sales numbers saw the ASX 200 hit a morning high of 4763.9, with all sectors in the black at one stage.

However, the market was spooked mid to late morning when speculation hit trading floors that Lloyds Banking Group in the UK was to raise US$22 billion in new equity, at a 60% discount.

While the market knew that a Lloyds raising was in the offing, the scale of the discount certainly caught the market wrong footed. The size of discount is likely to be very appealing to global fund managers, and could potentially result in the selling of holdings to raise funds to participate in the re-capitalisation.

Also, reports out of China that October copper imports fell 45% on month did little to settle investor nerves, with the data spurring concerns that underlying demand is insufficient to absorb record high imports and growing domestic output.

The materials sector is doing most of the damage, really selling off on the back of this news from China, seemingly concerned that the latest numbers might kill off hopes of a materials led Santa Claus rally.

Overall, the market looks very tired. It's been a "very" long year. Investors and traders alike have been through the gamut of emotions - from the depths of fear and despair in March to the euphoria of 50% plus gains since that time. Now it just seems exhausted, psychologically exhausted and looking towards the Christmas break.

While we'd normally be cheering for a Santa Claus rally, we're now starting to question whether or not it will play out. This year the textbook has been thrown out the window. We've rallied when we shouldn't have and stood still when we'd been expected to run. For the time being the market seems to be out of ideas. The fact that any reasonable gains on a given day seem to be met with selling suggests a lack of energy (or interest) to push higher. While many, including ourselves have been calling the ASX 200 to hit 5000 by year end, there doesn't appear to be the current impetus to get there.

Turning our attention to the market and all sectors except the information technology finished in the red after they were all in the black early this morning. While the property trusts (-1.3%) were down the most, the materials sector did most of the damage, finishing 0.9% lower.

Among materials stocks, Alumina led the way south, detracting 4.1%. Elsewhere, the diversified miners in Fortescue Metals Group, Rio Tinto and BHP Billiton were all down between 0.6% and 2.6%, with Fortescue Metals Group the underperformer. Also, the big gold miners were mixed with Lihir Gold finishing weaker by 1.1% while Newcrest Mining managed to rise 0.6% after gold recovered some of its early losses.

On the back of strong price gains, UBS lifted Rio Tinto's target price to $82 from $72.50, saying Cloud Peak IPO values these assets well above UBS's valuation. It said "the float of Cloud Peak, set to deliver Rio net proceeds of at least US$741 million, sees us lift our net profit forecast for 2009 by 7.8% but makes no change to underlying earnings. It maintains its preference for Rio Tinto over rival BHP Billiton, partly on its superior leverage to iron ore prices as outlook for the steelmaking input brightens. Indian spot prices for iron ore are now above US$100 a metric ton. Australian and Brazilian miners will be arguing in annual price talks that China should pay them a higher free-on-board price to bring their landed prices up to the same level as Indian spot material". It rates Rio Tinto a ‘buy'.

The financials detracted points from the overall market, down 0.7% with AMP the worst performer, down 1.7%. The big banks were all weaker, down between 0.1% and 1.4%, with National Australia Bank the biggest decliner. Suncorp - Metway added 0.7% after new CEO Patrick Snowball released the results of a major review.

He said "business is fundamentally sound, with no need for transformation despite ongoing speculation it might sell its banking division, where rising bad debts weighed on FY profit. Core-bank credit quality remains strong and the disposal of non-core bank assets is running ahead of schedule in 1Q".

Elsewhere, the energy sector was in focus early as it was the biggest gainer among sectors, spurred by renewed speculation that BHP Billiton might make a takeover bid for Woodside Petroleum. The sector eventually closed 0.4% weaker with Woodside Petroleum up 0.8%, well off its morning high.

Discussion of the potential takeover bid resurfaced in the Australian Financial Review's Street Talk this morning. Apparently, the theory came from hedge fund circles in London, however, market participants have long speculated such a deal makes sense, with synergies to be reaped at North West Shelf. Speculation has intensified this year, with BHP Billiton cashed up and Woodside strong in areas in which the mining giant wants to expand. Woodside Petroleum's 34% shareholder Royal Dutch Shell is a potential stumbling block and analysts are divided on whether it would sell out after its full takeover offer for the group was blocked by the government in 2001. Deterrents to a BHP Billiton takeover also include Woodside Petroleum's big price tag, it has a market value of about A$36 billion. Also, there are risks associated with its LNG pipeline and BHP Billiton not wanting to stray too far from diversified mining strategy.

Prices are in AUD unless otherwise stated.
IG Markets Ltd, Australian Financial Service Licence No. 220440. ABN 84 099 019 851.
This information is provided for information purposes and should not be regarded as financial product advice. This information does not take into account your specific objectives, financial situation or needs. Therefore you should consider the information in light of your specific objectives, situation or needs before making any trading or investment decision. IG Markets recommends you take independent financial advice before any decision whether to trade with IG Markets in the products we offer.

Comments from our readers

No comments yet