ASX CLOSE: Market closes higher; business confident dips

Tuesday 13th October 2009

Regional markets across Asia were mainly higher this Tuesday following solid overnight leads from Wall St despite the Columbus Day holiday. Also, steelmakers and banking stocks are mostly stronger after brokerage firms recommended them and Japanese automakers benefitted from a weakening yen. The only market to finish in the red was the Kospi, down 0.4%. The Hang Seng and Shanghai Composite are currently up 1.8% and 1.5% while the Nikkei 225 was up 0.8%.

In Australia, the ASX 200 was firmer by 1% at 4785.7.20 on broad based strength despite a dip in business confidence. National Australia Bank business confidence and conditions both fell in September from August, ending what has been an incredible turnaround this year. Business confidence fell four points to +14, while business conditions dropped one point to +3 points.

As we've seen so often, yesterday's minor sell off has been met by significant buying today as investors scramble to buy any dip, no matter how shallow. Financials, which experienced a rare down day yesterday, were the big beneficiary after a major broker upgrade for Commonwealth Bank of Australia.

With the big four banks driving the last 3 months of gains here in Australia, there's scope for further upside should this week see better-than-expected earnings from the big US financial institutions. The last three days of the week see heavyweights JPMorgan, Citigroup, Goldman Sachs and Bank of America report Q3 earnings. Significant buying in the financials ETF suggests a high degree of optimism.

It seems investors are still happy to bid the market higher heading into the bulk of the reporting period. They took some confidence from earnings upgrades overnight, with the latest being Black & Decker.

Turning our attention to the local market and the financials (1.4%) sector added the most points today after a solid set of overnight leads. AMP (3%), Westpac Banking Corporation (1.8%), ANZ (1.8%) and Commonwealth Bank of Australia (1.9%) were the major gainers.

Merrill Lynch upgraded Commonwealth Bank of Australia to ‘buy' from ‘underperform' and elevated it to its top sector pick. It said "current pricing ignores Commonwealth Bank of Australia's superior return profile. Its earnings mix should still deliver a sustainably higher return-on-equity than the sector average, which we do not believe is adequately captured in Commonwealth Bank of Australia's current discount to the sector. It is also delivering superior asset growth".

Also, in the same report, Merrill Lynch downgraded ANZ to ‘neutral' from ‘buy' and said that "ANZ's earnings mix and aggressive push into Asia could see sustainable return-on-equity at the bottom end of its peer group. While we concede that ANZ has bought well in Asia thus far and this strategy does provide a relative growth option for the business, with the stock trading at the top end of peers on a normalized earnings-per-share basis, we find it difficult to justify current valuations".

The materials sector was the second best performer today, rising 1.3% with the likes of BlueScope Steel (4.3%), Newcrest Mining (2.6%), Lihir Gold (1.9%), Rio Tinto (1.5%) and BHP Billiton (0.9%) all adding significant points.

Fortescue Metals Group was flat on the day after Royal Bank of Scotland lowered the miners target to $4.42 from $4.86 after delaying expected start dates for planned expansions. It said "the inability to reach an acceptable financing arrangement with the Chinese raises some doubt about the timing of expansion options. Fortescue's mining, processing and shipping performance in FY1Q was better than expected and it has boosted its earnings forecasts for the miner by 76% in FY10 and 17% in FY11 on higher expected production".

Elsewhere in the sector, Royal Bank of Scotland has begun coverage of Whitehaven Coal (-0.8%) with a ‘buy' recommendation and a target price of $4.40. It said "Whitehaven offers leverage to the thermal coal market and the Narrabri long wall mine will provide a step change in earnings in the short term. It is also a standout takeover target with similarities to Felix Resources in that it has production growth via a flagship project, a stake in coal port infrastructure and majority owners who would be sellers at the right price".

The consumer discretionary sector was also a solid performer, rising 1.1%, led by a 4.5% gain in Ten Holdings and a 3.4% rise at Harvey Norman. David Jones was up 2.9%.

Following Crude Oil's 2% rise overnight to above the $73 per barrel level on US dollar weakness and equity markets strength, the local energy sector had a good session today, rising 0.5% with Paladin Energy (1.9%) and Woodside Petroleum (0.7%) the best performers.

Prices are in AUD unless otherwise stated.
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