ASX CLOSE: Market weaker on US leads

Friday 13th November 2009

Across Asia, regional markets are mostly weaker after a negative set of leads from overnight trade weigh and energy and commodity stocks retreat following a bounce in the US dollar. The Shanghai Composite is the biggest faller, down 1.2% while the Nikkei and Kospi are 0.3% and 0.2% weaker respectively. The Hang Seng is up 0.1%.

In Australia, the ASX 200 closed 0.9% lower at 4706.4 after trading as low as 4690.9 this morning. There were very few local catalysts today so we basically mirrored weak US leads with the highly cyclical materials and financials detracting the bulk of the points. The defensive sectors were the best performers, benefitting from inflows as traders positioned themselves for a few days of weakness.

On the back of six straight gains in the US and four here, it's completely expected to see a pullback, especially when faced with major resistance like 1100 on the S&P 500.

Despite a stronger-than-expected jobless claims number, Wall St was spooked by higher-than-expected oil inventory data which pointed toward weak energy demand. Also, the bounce in the US dollar saw investors selling riskier assets like equities and risk currencies.

We've begun to see evidence this week of commodity price forecasts (which have significantly trailed spot prices) being upgraded by brokers, leading to upward EPS revisions and higher valuations. All of a sudden we could see stocks trading at 20x 2010 earnings, and considered expensive, reprice at 15x 2010 earning and be seen as good value. This thematic is the rationale behind expectations of materials leading any Santa Claus rally we may see.

Turning our attention to the market and it was the cyclical sectors which did the most damage today.

In the materials space, overnight strength in the US dollar weighed on commodity price, in turn hurting the resource based stocks. Following gold's significant fall overnight, Newcrest Mining and Lihir Gold were atop of the decliners list, detracting 2.8% and 2.3%. The big diversified miners didn't escape the pullback with BHP Billiton and Rio Tinto losing 1.4% and 0.5%.

Following yesterday's less than positive AGM comments, Citigroup reduced Bluescope Steel's (-0.7%) target to $3.10 from $3.40 after the steel producer reaffirmed first half guidance of a small loss. It said "like every other steel producer, Bluescope suggested that demand is improving, albeit slowly, something the market does not seem to appreciate. The broker also cuts FY10 and FY11 adjusted net income forecasts by 6.3% to $148 million and 8.8% to $466 million, respectively. The market is anticipating upgrades in coming months, and the risk is this may not happen. We expect the shares to be range bound until more definitive macro data - positive or negative, emerges". It kept its ‘hold' rating, with the stock trading at 11 times Citigroup's 2-year forward earnings.

Elsewhere, UBS has tipped Incitec Pivot (-1.1%) to post a FY profit before items of $352 million on Monday, down 46% on year. It forecast a net profit of $252 million including one-off costs of $100 million fore write-down's, Dyno integration costs and plant closures. UBS said "it will be interested in commentary on North American explosives volumes and market, details on Moranbah ammonium nitrate plant project, assessment of domestic fertilizer demand ahead of spring planting, debt restructure and 2H cash flow. Incitec's cost-cutting program may be more than expected, its net debt lower due to better cash flow and FX, and may cut U.S. plant capacity".

In the financials space, National Australia Bank was the biggest decliner, falling 4% after it paid a dividend of 73 cents. The remaining big four banks all finished lower too, down between 0.5% and 2% with ANZ faring the worst. On the upside, Axa Asia Pacific and Insurance Australia group managed to buck the overall trend, finishing higher by 1.1% and 0.3%.

Following Westfield Group's trading update yesterday, JPMorgan cut the group to ‘neutral' from ‘overweight' and lowered its target to $12.53 from $12.70 after US mall sales contraction accelerated in Q3. It said "taking a strong view on Westfield Group one way or the other is difficult in our view because the trading conditions onshore are so starkly different to what's happening offshore. In Australia, the specialty rent growth is outstanding and its malls have proven resilient yet again to macro slowdowns. Contrast this with what we think are the most difficult conditions Westfield Group has faced in the US currently playing out - net operating income growth is likely to be down again in FY10". Elsewhere however, UBS boosted the stocks target to $13.02 from $12.57 after the Q3 results showed Australian portfolio and consumer resilience through the financial crisis.

Elsewhere, the energy and industrial sectors weighed, both closing 0.7% lower as the likes of Asciano (-1.8%), Paladin Energy (-2.6%) and Caltex Australia (-2.1%) detracted points.

On the upside, the defensive utilities, telecommunications and consumer staples sectors all added 0.5%. Foster's Group (1.3%), Coca-Cola Amatil (1.1%) and Wesfarmers (0.8%) were the standouts among staples stocks.

Prices are in AUD unless otherwise stated.
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