ASX CLOSE: Markets rise on increased investor confidence

Tuesday 10th November 2009

Across Asia, regional markets are all higher on the back of the strong overnight leads, the fast improving global sentiment and a rally in commodities that have ignited the materials sector. The Nikkei 225 is the best performer, up 1.3% while the Hang Seng is adding 0.8%, the Kospi 0.6% and the Shanghai Composite 0.5%.

In Australia, the ASX 200 was up 1.3% at 4733.6, off earlier highs of 4756.80. We've seen a marked rise in investor confidence which has translated into share price gains across the board, especially among commodity based and financial stocks.

Many analysts and professionals have been throwing end-of-year targets of 5000 - 5200 around. The last few weeks has seen a pullback, followed by three days of strength which could well be the start of an extended ‘Santa Claus' rally. It feels like we're just coming out of the ‘calm before the storm'.

The materials sector has been tipped to drive the market into year end, with many saying upgrades to commodity price forecasts are likely as spot prices are already trading above 2010 estimates. We may be beginning to see this with both Goldman Sachs JBWere and Macquarie Group upgrading their thermal coal forecasts yesterday.

However, there are still a few points keeping the bears hopeful of further falls. Locally, resistance through the 4750 level could potentially see the formation of the right hand shoulder of a bearish head and shoulders reversal pattern. However, we would need to see a significant reversal to confirm this. Also of interest has been the declining volume on the rally for both the Dow Jones Industrial Average and S&P 500. For the rally to continue, we need to see volume expanding sooner rather than later.

In economic news, Australian business conditions rose 9 points to +12 in October while business confidence gained 2 points to +16. The result could strengthen the view that the RBA can safely raise rates in December without threatening the economic recovery. National Australia Bank chief economist Alan Oster expects rate hikes at every monthly policy meeting until March, lifting cash rate target to 4.25%, from 3.50% now.

Focusing on the market and it was the materials (1.9%), energy (1.5%), consumer staples (1.5%) and financials (1%) sectors adding the majority of points today.

Among the materials stocks, Fortescue Metals Group (3.3%), Orica (2.2%), Rio Tinto (2.6%) and BHP Billiton (2.3%) were the biggest percentage gainers on the back of stronger base metal prices in Asian trading which offset overnight softness.

Following yesterday FY operating profit, Credit Suisse boosted Orica to ‘outperform' from ‘neutral' and raised its price target to $27.75 from $26.00 after the explosives manufacturer posted a FY operating profit of $646.1 million, well ahead of its forecast of $603 million. It said "trading at 12.5 times PE, Orica is inexpensive in our view. A strong balance sheet (gearing of less than 25%, interest cover of about eight times) and earnings upgrades provides a margin of relatively safety". Also, JPMorgan raised Orica's target to $26 from $23.19 and upped its FY10-12 operating profit forecasts. "This was an excellent result and guidance for further growth is pleasing. Orica is well positioned to benefit from improvement in global explosives markets. We believe it offers a quality earnings stream with relatively low risk. However, with the stock trading at 12.5 times, we don't see sufficient upside to justify an ‘overweight' rating".

In the energy sector, the likes of Caltex, Paladin Energy, WorleyParsons, Origin Energy and Woodside Petroleum were the biggest risers, adding between 1.5% and 2% after Crude Oil prices moved back above the $79.00 per barrel level overnight on concerns tropical storm Ida might disrupt oil and natural gas installations in the Gulf of Mexico.

The likes of Foster's Group and Wesfarmers added the bulk of the points in the consumer staples sector, rising 3.1% and 2.8%. Foster's Group's gain came on the back of renewed speculation that it is a ‘sitting duck' for a takeover target, according to Southern Cross Equities.

In the financials space, AMP led the way, rising 4.4% as brokers suggested it may be a takeover target itself. Elsewhere, the big banks were all up between 0.5% and 1.8%, with National Australia Bank the best performer. AXA Asia Pacific rallied another 1.2% with the majority of brokers believing a higher bid will be forthcoming.

Merrill Lynch said "while AMP and AXA SA's bid for AXA Asia Pacific seems a full offer, a higher bid is needed to get shareholder support. With 32% of shareholders eligible to vote on the scheme of 'retail' background, and with the AXA APH board having rejected the offer, we are of the view that a higher offer will be required for the transaction to proceed. However, the offer is unlikely to be much more than $6 a share. We cannot envisage an offer for AXA APH above $6.00 a share flying with either AMP or AXA SA shareholders. Elsewhere, Citigroup believes AMP and AXA SA will likely increase their offer for AXA Asia Pacific. It said "we would be surprised if this is the end of the matter, rather we expect at some stage to see a revised offer which should find greater favour with the independent AXA APH directors, though of course we should remember that these directors did not give in easily the last time such a conditional offer was made, back in 2004. This time, however, they have their parent company and major competitor working in cohorts to try and get them to sell".

Also, Commonwealth Bank of Australia's Q1 trading result yesterday generated some price and earnings upgrades from brokers. Royal Bank of Scotland boosted its target to $55.65 from $51.45 after it upgraded FY10 forecasts by 4% - 5% and is now tipping full year cash earnings of $5.43 billion. It said "we acknowledge that this is below an annualized 1Q figure, but it takes into account headwinds from lower fees in retail that take effect from October 1, subdued asset growth and with lower trading income". Royal Bank of Scotland kept its ‘hold' rating on the stock.

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