ASX CLOSE: ASX 200 returns to positive territory after RBA raises cash rate

Tuesday 1st December 2009

Asian markets are broadly higher this Tuesday afternoon as fears over the Dubai debt crisis abate, Japan's finance minister says he is open to quantitative easing to help get the country out of deflation and Australia's RBA pulls the rates trigger for a third consecutive month. The Nikkei 225 is the strongest performing regional market, up 1.6%, while the Kospi and the Hang Seng are up 0.5% respectively. The Shanghai Composite is bringing up the rear, flat for the session.

In Australia, the ASX 200 was higher by 0.4% at 4719, returning to positive territory after the RBA raised the Australian cash rate by 25bps to 3.75%. The benchmark index traded in a ‘helter skelter' fashion over the course of the day, continually gyrating above and below the flatline. Sector heavyweights, the financial and the materials traded in a choppy manner with leadership coming predominantly from the energy and industrial sectors.

The RBA clearly took advantage of the fact that markets had largely expected a rate hike. Had markets seen a December rate hike as less than even chance the RBA probably would have held steady, particularly as the need for a third consecutive hike was highly debatable. Market expectation no doubt afforded the RBA the luxury of making such a marginal call.

Once again the market seems unsure as to which direction it wants to head and this has been evident by the benchmark index oscillating in and out of positive territory.

While global markets seem to have moved past the likelihood of catastrophic losses causing any sort of systemic meltdown, the "Dubai debt crisis" may yet have a less obvious, but longer lasting impact on investor psychology. While disaster may have been averted on this occasion, the whole episode served as a reminder as to what could happen. With the GFC still so fresh in everyone's mind, such "landmines" can quickly invoke those traumatised memories of those dark months from earlier this year and see investors go back into their shells.

With this mindset now seemingly in place, there seems to be a growing want to take the rest of the year off, that is, pull stumps early and remember this year for what it was - One not from the text book but one for the history book. The market is trading like it doesn't have the energy for one last hurrah before Christmas. While the "money on the sidelines" theory may well be true, it's becoming increasingly uncertain whether it will find its way back into the market this calendar year. This thinking seemed to be supported by the fact that yesterday's 2.8% rally was largely premised on short covering and on paltry value of just $3.1b, some 35% below the normal November average. On a technical basis, this is a worrying sign.

Turning our attention to the market and it really was a flat session. The industrials sector was the standout performer, rising 1% as the likes of Qantas, Asciano, Leighton Holding and Downer EDI all gained between 1.9% and 3.9%, with Asciano the frontrunner.

Qantas was helped along by its October traffic numbers which show continued stronger on-year load factors. Although on-year yields are still down about 10% on domestic routes and 24% on international routes following heavy discounting, full airplanes are a prerequisite for lifting ticket prices, which Qantas has done for the second time in three months.

The energy sector also added points, rising 0.6%. Gains were driven by the heavily weighted stocks with Oil Search rising 3%, Santos 1.5% and Woodside Petroleum 1.1%.

A report from UBS helped Woodside Petroleum. The broker said it remains bullish on Woodside Petroleum's prospects for expanding its Pluto LNG project to two production units. Woodside announced a 20-plus well exploration drilling campaign over the next 18 months to support the expansion. Results from the first two wells look good. We therefore remain bullish, and assume the overall program will produce the results needed to ultimately support Pluto LNG expansion along with third-party gas. The first stage of Pluto looks to be on schedule but could face delays. Besides issues related to worker productivity and unions, our biggest worry is the onset of cyclone season. It lowered its price target slightly to $60.75 from $61.04, but maintained its ‘buy' recommendation.

Elsewhere, the financials sector rose 0.4% with individual names mixed for the session. Commonwealth Bank of Australia was the best performer, rallying 2% while QBE Insurance Group was a close second, up 1.5%. Macquarie Group posted a solid rise of 1% while Westpac Banking Corporation was up 0.2%. National Australia Bank and ANZ fell 0.2% and 0.8% respectively.

The materials sector finished modestly higher for the session, stronger by 0.2%. Bluescope Steel was the standout performer, adding 4.1% after a broker upgraded the steel sector overnight. Newcrest Mining and Fortescue Metals Group were up 1.7% and 1.4% while on the downside, Orica and Lihir Gold were the main drags, down 0.7% and 0.6%.

In a report from Commonwealth Bank of Australia, it raised its commodity price expectations following a recent trip to China. We believe that the risk of a price correction in the next 6-9 months remains real, but we have tempered expectations for a base metals pullback in 2010. It upped its 2010-11 coking coal forecast to US$190/ton, up 22% vs previous forecast. It expects iron ore contract prices to rise 20% for fines, 25% for lump vs previous +13% and +16%, respectively, for 2010-11. Its other preferred commodities are copper and zinc. It raised 1H 2010 copper forecast by 3% to US$6,194/ton, with zinc upped by 4% to US$1,956.

Prices are in AUD unless otherwise stated.
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