ASX CLOSE: Reporting season ends, market likes ANZ trading update

Monday 31st August 2009

Across Asia, regional markets are significantly lower this Monday as the Democratic Party of Japan's election victory sent the yen higher, in turn sending exporters lower.

Weakness among mining companies also weighed. The Nikkei 225 is down 0.2% after trading higher early while elsewhere, the Hang Seng and Kospi are down 1.8% and 1%. The Shanghai Composite is down 5.2%.

Given the weak leads from US markets, the end of reporting season and the onset of the traditionally weak equities month of September, the Australian market was called to open lower. It surprised however, riding on the coat tails of morning strength in Asian markets which celebrated the election of a new Japanese government.

By mid-morning, the grim reality of the economic challenges that lay ahead for Japan seemed to hit home with the market trading off from a 2% gain back into negative territory, dragging the region with it.

After spending the session oscillating in and out of positive territory the ASX 200 eventually settled down 0.2% at 4479.1. It traded up to 4537.2 this morning, setting a new 10-month high before weakness across the region began to weigh. The majority of the strength came from the financials space following a stronger-than-expected trading update from ANZ.

The market clearly liked the ANZ trading update. A more optimistic outlook surrounding impaired loans, confirmation of its dividend levels and stability of profitability all helped confirm the growing belief that ANZ has now seen the worst of the financial crisis.

Investors seemed relieved that the bank now appears back on the front foot in terms of pursuing growth.

Heading into September, market professionals are united in their calls for a pullback. It's rallied so far in such a short-time frame that it would be completely healthy to see a meaningful correction.

With the reporting season officially over as of today, investors will be closely watching this week's key economic releases, being Tuesday's RBA decision and Wednesday's Q2 GDP print.

The Q2 GDP number is being seen as vitally important to both the timing and magnitude of the RBA's rate hiking campaign. A hotter-than-expected number is likely to increase economist's calls for a pre-Christmas rate rise however the RBA has previously warned they would be very reluctant to pull the rates trigger too early.

With the consumer still considered fragile, and government stimulus set to be phased out, the RBA would be taking a massive punt on the strength and resilience of Australian consumers, not to mention potentially jeopardising the retails sector's all important Christmas shopping season. With inflation concerns non existent, there wouldn't seem to be any massive urgency to hike rates.

Today's 3.4% decline in inventories, the sharpest fall since records began in 1985, is likely to see some of the earlier optimism about a better-than-expected Q2 GDP print begin to wane. The upside to the fall in inventories in Q2 is that Q3 is likely to see some upward revisions as output picks up to rebuild inventory levels.

Looking across the sectors, the financials (1.2%), property trusts (0.7%) and consumer discretionary (0.4%) sectors were the major gainers.

The financials sector added the majority of points today with ANZ and Macquarie Group the standout performers, up 4.1% and 3.8% respectively. Elsewhere, the three remaining major banks all rose between 0.2% and 2.4%.

The sector was buoyed this morning by ANZ's strong trading update, saying bad loan charges were not as bad as it had previously forecast and that underlying performance was solid despite ongoing challenges in the global environment. With ANZ having the largest credit risk exposure of the big four banks, the focus was certainly on bad debts. Impaired loans rose 7% for the June quarter, a slower rate of increase than for the two previous quarters. Group CEO Mike Smith said he expects 2H09 to be one of the worst halves for bad debts since the onset of the global financial crisis, but the situation has bottomed and he is looking for 1H10 bad debts to be at similar levels to 2H09. He's comfortable with the group's current dividend levels, with margins also improving.

The consumer discretionary sector also performed well with Harvey Norman adding to Friday's gains, settling 5.4% higher. Elsewhere, West Australia News, David Jones, JB HiFi and Tatts Group were all up between 2% and 5.5%.

There were wide ranging upgrades from no fewer than five top brokers this morning for Harvey Norman, with many of them upping price targets to above $4. For example, JPMorgan upgraded the retailer to ‘overweight' from ‘underweight' and raised its target to $4.21 from $2.89 after margins surprised on the upside.

In the property trust space, Mirvac Group (4.6%), Macquarie Countrywide Trust (2.4%), Goodman Group (4.2%) and Westfield Group (1.3%) were the main drivers.

On the downside, the materials and energy sectors detracted the most points, down 1.7% and 1% respectively. The likes of BHP Billiton (-2.8%), Bluescope Steel (2.4%), Rio Tinto (-2.1%) and Amcor (1.2%) were the major movers among materials while Caltex Australia, Oil Search, Worley Parsons and Woodside Petroleum were all lower between 1.4% and 3.4%.

Prices are in AUD unless otherwise stated.
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