ASX closes down 2.4%

Thursday 29th October 2009

Across Asia, it’s a sea of red for regional equity markets as investors continue to offload highly cyclical stocks amid concerns over the recovery in global growth.

The Hang Seng and Shanghai Composite are down the most, lower by 2.5% and 2% respectively while the Nikkei is down 1.8% and the Kospi 1.7%.

In Australia, the ASX 200 made fresh lows during afternoon trade before stabilising late to close down 2.4% at 4574.7

As well as bearish overnight leads, outlook comments from ANZ CEO Mike Smith that the RBA’s rate rise was ‘premature’ and that the Australian economy was still ‘fragile’ compounded the selling.

Everybody’s been calling for a correction but I think the speed and volume of what we’re seeing has caught the market by surprise.

There has been a big change in underlying sentiment which has triggered faint alarm bells. Pullbacks in recent months have been characterised by low volumes.

However, this latest wave of selling has been driven by strongly increasing volumes and indicates a far greater level of conviction, with investors charging for the exit like ‘lemmings over a cliff’.

A lot of investors and traders were sitting on big profits and with the pain experienced earlier this year still fresh in their minds, are quickly going to cash in fear this might deteriorate into something a little more unexpected.

Assuming this correction continues to play out, the big question for the market will be at what point institutions find prices too hard to resist.

This will really test the ‘sidelined money’ and ‘buy on dips’ philosophies that have been bandied around by commentators in recent months. Recent selling across global equities on the back of mixed economic data raises the question of whether the RBA was too overzealous in raising rates this month and whether the market were too bullish in predicting a 50 bps hike in November.

The fall in risk currencies such as the euro and Aussie in recent days suggests this maybe the case. Focussing on the Australian market and it was the property trusts (-4.4%), materials (-3.4%), energy (-2.9%), financials (-2.8%) and consumer discretionary (-2%) sectors which suffered the most today.

Given its huge leverage to the cyclical growth story, the mining sector came under enormous selling pressure today as investors chose to dump resources related stocks following widespread selling in offshore peers.

Rio Tinto (-4.9%), Bluescope (-4.3%), Newcrest Mining (-4.3%) and BHP Billiton (-3.3%) were the biggest percentage fallers.

In its third quarter production update this morning, Lihir Gold (-2.6%) gave a strong signal for the positive outlook for the company by announcing its first dividend payment since 2003 and upping tis long term gold price assumptions.

A spokesman for the gold miner said “the interim dividend of 1.5 U.S. cents per share is a reflection of the company's confidence in the strength of its position and that it expects to be able to maintain payments at a similar level in the future.

It also upgraded its gold reserves at its Lihir Island mine in Papua New Guinea by 36% to 28.8 million ounces. These positives helped overshadow a 21% drop in Q3 gold production following planned maintenance at Lihir Island.

Also, there were unconfirmed reports today that Rio Tinto has begun talks with Chinalco over a joint investment in Mongolia. According to sources close to both Rio Tinto and Chinalco, the pair is now in talks on possible cooperation at the US$4 billion Oyu Tolgoi copper-gold development in Mongolia.

The energy sector was down heavily following a 2.6% fall in Crude Oil prices overnight, pressured by a stronger US dollar, weak new homes sales data and an unexpected rise in US inventories of gasoline.

Leading the sector south were Paladin Energy, WorleyParsons, Woodside Petroleum and Santos, all down between 2.7% and 4.9% with Paladin faring the worst.

Royal Bank of Scotland downgraded WorleyParsons to ‘sell’ from ‘hold’ and lowered its price target to $20.82 from $24.61.

It said “we see Worley as a high-quality engineering-services company with a proven track record of EPS-accretive M&A, capable of delivering long-term growth. In the nearer term, however, our concerns are about lower-than-consensus FY10 earnings as currency risks bite, the outlook and single-digit EPS growth in FY11 combine to create a near-term valuation dilemma”.

The financials sector received a lot of attention today as ANZ released their full year result.

However, this didn’t limit the selling with the big four banks all suffering heavy falls. Bendigo Bank and Macquarie Group were the biggest percentage decliners, losing 4.5% and 3.3% while the big four banks were all lower by between 2.1% and 3%, with Commonwealth Bank of Australia the worst and ANZ the best performers.

ANZ this morning reported a full year net profit of $2.94 billion from $3.32 billion as higher bad debt charges and one time tax and derivative losses offset stronger revenue.

In response to the result, Credit Suisse said “the result was ahead of expectations. Group's margin expansion and outlook statement, which included the key positive statement that credit quality has now stabilized were key positives.

ANZ's result had similar themes to National Australia Bank's result yesterday, including strong Australian margins, but with a more positive tone on the outlook”.

Elsewhere, Citigroup upgraded ANZ to a ‘buy’ from ‘hold’ following the result. It said “group's 20% increase in its final dividend to 56 cents a share from 46 cent first half dividend is a signal of confidence.

Margin performance was a standout, as was the exceptional markets division performance”. On the upside, the typically defensive sectors outperformed with the healthcare and telecommunications sectors managing to post gains of 0.5% and 0.4%.

Prices are in AUD unless otherwise stated.
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