ASX CLOSE: Markets lower; traders take profits

Friday 2nd October 2009

Across Asia, equity markets were sharply lower this Friday as bearish leads from the US weighed and investors and cfd traders worried about the pace of the economic recovery and whether or not it's sustainable. The Nikkei 225 and Kospi finished 2.5% and 1.7% weaker while stocks are still trading in Hong Kong, with the Hang Seng currently 2.4% lower.

In Australia, the ASX 200 closed 2.1% lower at 4601.7 after trading to a low of 4601.5. The materials, financials and energy sectors did most of the damage as cfd and stock traders took profits from stocks that are the most highly leveraged to the economic recovery.

As expected, the defensive utilities and healthcare sectors outperformed on a relative basis as cfd traders and investors seek cover for an increase in volatility.

This could be one of the few times in stock market history where traders actually want to see the markets take a breather and consolidate lower. It is pretty much consensus across the market that it has run ahead of itself and that a pullback would be healthy, and that the pace of economic recovery was likely to slow.

It's becoming more and more evident that there were some serious amounts of window dressing occurring at the end of September and Q3. It's as if all the weaker-than-expected economic data releases were held back until the new quarter. Now that we're into the new month, the buy switch has been flicked to ‘off' and the ‘proceed with caution' dial turned up.

However, the big question remains how far the market is going to pullback. We just can't see that many investors out there who are going to sell in size. It's highly unlikely that we'll see the wholesale portfolio liquidations that saw the market collapse last year. Rather, this market is very under-owned so the big funds are looking to ‘buy the dips'.

This is the key. So far the buyers have stepped in early and bought after very shallow pullbacks. There is no way of telling what they will do this time, but there will certainly be a lot of buying on weakness. Our pick is somewhere between 5% - 10%.

Turning our attention to the market and as mentioned above, it was the cyclical sectors which detracted the most points today.

The materials sector was easily the biggest percentage faller, down 2.8% after base metals were all weaker in London Metals Exchange trade with Copper the worst performer, down 2.8%. Zinc, Aluminium and Nickel were all down between 1.5% and 1.4%.

Despite a number of broker upgrades, it was a sea of red across the materials space with BlueScope Steel (-4.3%), Alumina (-3.6%), Newcrest Mining (-3%), Rio Tinto (-2.9%) and BHP Billiton (-2.7%) leading the way south.

Royal Bank of Scotland raised its price target for BHP Billiton to $46.88 from $43.08 after boosting its medium and long term metal price forecasts. It now expects copper to peak at US$4.30 per pound in FY13 and raises long-term forecast 29% to US$2.25 per pound from US$1.75 per pound. It has maintained its ‘buy' rating on the stock and said "BHP Billiton is one of the best placed miners to take advantage of the global economic recovery and the subsequent increase in commodity demand".

Also, Royal Bank of Scotland upped Newcrest Mining's target to $40.60 from $33.57 on revised copper and gold price forecasts. It said "in our view, Newcrest Mining remains the highest quality gold exposure on the ASX. Management has also shown a good understanding of the cost divers in the company's business and an ability to bring them down where possible".

In the financials (-2.2%) space, Macquarie Group was the biggest detractor, down 5.2% while the big four banks all lost between 1.7% and 3.1%. It is not surprising to see some money coming out of the financials as they have outperformed over recent months.

Elsewhere, the energy sector was down 2.1% on the back of falls in Paladin Energy (-3.8%), Oil Search (-3.1%), Caltex (-2.7%) and Santos (-2.6%).

Prices are in AUD unless otherwise stated.
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