ASX CLOSE: Market finishes stronger on back of positive job data

Thursday 8th October 2009

Equity markets all finished in positive territory across Asia today as Alcoa's better-than-expected result and Australia's strong employment data buoyed investors. The Hang Seng is currently 0.4% higher while the Nikkei 225 and Kospi closed up 0.2% and 0.4%, respectively.

Down under in Australia, the ASX 200 finished stronger, up 1.6% at 4768.6 after surging on the back of the surprise creation of 40,000 jobs in September and a drop of 0.1% in the unemployment rate. The financials added the bulk of the points, up 2.7% after brokers upgraded their forecasts and noted possible share buybacks in the coming years.

This morning's after-hours report from Alcoa boosted sentiment early and saw the market open on the front foot. For the first company reporting Q3 earnings to beat expectations by so much is a stellar performance. Not only did it beat forecasts, it posted its first quarterly profit after three consecutive losses and has set upbeat expectations for the remainder of the Q3 reporting period.

Combined with positive broker comments this morning, the sharply better-than-expected employment numbers are extremely bullish for the financials sector, as well as the overall market. The next few days could easily see upward re-ratings from the brokers as they re-model bank bad debt forecasts and possible write-backs of large bad debt provisions.

It's pretty obvious the RBA had an advanced read on today's employment numbers and can now more easily justify the reason they pulled the rates trigger. The creation of 40,000 jobs against forecast losses of 10,000, and the unemployment rate falling to 5.7% would certainly seem to suggest we have seen peak unemployment, particularly given the positive reads from recent forward looking indicators.

Financials were again the dominant sector of the session rising 2.7% and adding 51 points to the index with there seemingly being no limit to current investor appetite for the sector. Clearly benefitting from the surprising employment data and all that it entails for lending activity and bank profitability, the Big 4 were all higher between 2.7% and 4%. The regional banks were also well bid with Bendigo Bank and Suncorp-Metway higher by 2.8% and 2.3% respectively.

Some positive broker notes also helped boost the sector with Morgan Stanley raising its forecasts and targets for Australian banks, as well as upgrading the National Australia Bank to ‘equalweight' from ‘underweight' and upping its target to $30.20 from $18.30. It also raised its target for Westpac Banking Corporation to $22.80 from $19.10, for Commonwealth Bank of Australia to $44.00 from $37.90. Morgan Stanley said "it concedes it has been too bearish on outlook for Australian banks. However, despite more optimistic view, it retains a cautious industry outlook. Normalised return-on-equity at the banks is unlikely to return to pre-GFC levels and it sees near-term revenue headwinds and has residual concerns on outlook for credit quality.

Also, Credit Suisse believes Australia's major banks could buy back as much as $15 billion worth of shares in FY10 and FY11 and still have solid capital positions. It said "banks currently have $8.5 billion in surplus Tier 1 capital, forecast to rise to $18.1 billion in FY 10 and $27.2 billion in FY11 without some form of capital management. While banks offer earnings and share price momentum and a strengthening EPS growth profile, we see very limited share price upside among the major banks in our price target model".

The consumer discretionary sector was also well supported today, up 1.9% after the strong employment data supported the retailers and Credit Suisse upped forecasts among media stocks. Fairfax Media (6.7%), Harvey Norman (4.7%), Billabong International (3.6%) and Crown (2.4%) were the standout performers.

Credit Suisse upgraded stocks in the Australian media sector, saying "while the magnitude and speed of Australia's advertising recovery remains uncertain, signs of economic recovery are gaining momentum, suggesting there may be upside risk to our advertising expectations". It raised Fairfax, APN News & Media and Seek to ‘outperform', while also upgrading Austereo to ‘neutral'. It kept its ‘outperform' ratings on Austar and Consolidated Media, ‘neutral' rating on Seven and ‘underperform' recommendations on Ten Network and West Australian Newspaper Holdings.

The materials sector had another strong session, rising 0.9% with Alumina (4.6%), Orica (1.1%), BHP Billiton (0.9%) and Rio Tinto (0.9%) the top performers.

BHP Billiton yesterday reported a "mechanical failure" at the main haulage shaft at its Olympic Dam mine in South Australia. While BHP Billiton didn't give any details, Goldman Sachs suggests the implications could be serious. It said "the obvious and one of the most serious incidents that can occur in a haulage shaft would be the ore skip freefalling down the shaft. If this event has occurred the damage to the shaft and its internal loading stations and guides could be substantial, leading to an extended shutdown of haulage from the shaft".

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