ASX CLOSE: Financials drag market lower

Tuesday 17th November 2009

Across Asia, regional equity markets are mixed today despite a strong overnight lead from global markets on the back of higher commodity prices and strong US retail sales numbers. In Japan, stocks are weaker on the back of a strengthening yen, which is not good for the country's big exporters.

The Nikkei 225 is down 0.5% while the Hang Seng is down 0.4%. Elsewhere, the Kospi is up 0.2% while the Shanghai Composite is 0.4 higher.

In Australia, the ASX 200 finished 0.5% lower at 4729.4, well off this morning's high of 4799. The materials sector was the standout performer, up 0.6% while the defensive utilities and consumer staples also added points. The weakness we saw from the open really couldn't be attributed to any one thing. The market had certainly been expecting weakness among financials and strength in the materials sector.

However, the extent of the selling among financials caught the market by surprise. We saw a large dose of profit taking in the financial space following the huge run they've had over the last three months. To further compound this, the materials sector sold off its high heading into the close.

When a sector that has a 39% weighting to the overall market is used as a funding source, it's not too surprising to see the market finish lower. We wouldn't read too much into it; it's actually encouraging to see money rotating towards the more cyclical materials sector with sector rotation healthy for markets.

Meredith Whitney's comments late in the US session clearly spooked Asian markets more so than in the US.

Following the release of the RBA's monetary policy meeting minutes, ANZ said the "RBA's minutes gave no hint the central bank is looking to stop its process of removing stimulus, but reinforced the gradual approach to tightening with 25 basis point rises in December, January and March tipped. Inflation pressures will likely be the RBA's biggest concerns.

Turning our attention to the market, the big drag today was the financials sector, which accounts for 39% of the ASX. It was down 1.5% as traders and investors booked profits despite stronger overnight leads. Insurance Australia Group and Suncorp - Metway were the two biggest decliners, falling 3.7% and 3.2%. Takeover target Axa Asia Pacific lost 2.5% while elsewhere, the big four banks also suffered. They were down between zero and 2.5%, with Commonwealth Bank of Australia the biggest detractor.

Interestingly, Citigroup lifted its target for Commonwealth Bank of Australia to $60.00 from $54.00, saying it's less exposed to revenue headwinds than peers. Citigroup said "sector EPS growth will resume in face of key challenges stemming from anemic loan growth in 2H FY09, fee cuts across key products and likely drop in markets/treasury revenues after FY09 bonanza. Stripping out impact of recent acquisitions, FY10 growth is forecast to be mid-single-digit, with exception of CBA, which has "stronger balance sheet momentum" and stronger wealth management earnings". It has a ‘buy' rating on Commonwealth Bank of Australia and ANZ, saying both offer superior prospects for top-line growth in the year ahead.

Elsewhere, the industrials sector also weighed today, finishing 1.1% weaker. Leighton Holdings, Toll Holdings, Downer EDI and Brambles were the biggest decliners, losing between 2.2% and 3.1%.

On the upside, not even the market leading materials sector was able to avoid the afternoon retreat in stocks which turned what promised to be a breakout day into a highly disappointing trading session. Having been higher by nearly 2% earlier in the morning on the back of strong US leads and a stellar overnight performance across the commodities complex, the material sector finished the day higher by just 0.6%. Heavyweight miners BHP Billiton and Rio Tinto finished up by 1% and 0.7% respectively, but well off their earlier highs, while gold names completely rolled over, despite the gold price holding at just under US$1140/oz. Lihir Gold finished lower by 0.9% while Newcrest Mining was weaker by 0.5%. Among the other major materials names, Alumina, Orica and Amcor all closed higher between 0.7% and 3.4%

In broker news, Citigroup cut OneSteel's FY10 and FY11 earnings estimates by 5% and 2% respectively, with new forecasts 10% - 20% below market consensus, with steel trading conditions, especially pricing and margins, remaining difficult. Citi said "despite the recent stabilisation in Asian prices, domestic prices and spreads will likely remain under pressure into early 2010 from the AUD strength and import competition. Scrap margins will likely be pressured by low scrap flows and increased competition. For the stock to rally meaningfully from the current level, we think it needs earnings upgrades but investors may have little reason to do so, given the generally muted commentaries from steel producers". It maintains its ‘Hold' recommendation and $3.15 target.

Prices are in AUD unless otherwise stated.
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