ASX CLOSE: Materials and energy sectors drive market higher

Wednesday 2nd December 2009

Across Asia, regional equity markets are predominantly higher this Wednesday following a solid set of overnight leads and as commodity prices powered gained in resource stocks. The Kospi is the best performer, up 1.4% while the Hang Seng and the Shanghai Composite are 1.3% and 0.9% higher. The Nikkei 225 is up 0.2%.

In Australia, the ASX 200 finished 0.9% stronger at 4762.4 after trading as high as 4795.2 this morning. The materials and energy sectors drove the market higher today, although it's still having a tough time getting through the 4770 resistance zone on a closing basis.

Every time the market makes a push through this level it is rejected. There's a lot of selling between 4770 and 4800.

Yesterday's 25 basis point rise from the RBA was a vote of confidence in the strength of the domestic economy. This confidence is certainly being reflected on the market, with traders' seemingly happy to buy riskier assets.

In recent months, the analyst community has speculated materials would lead an end-of-year rally on the back of upgrades to commodity price forecasts. With the final month of the year upon us, could we be witnessing the onset of the resources led ‘Santa Claus' rally?

Gold's bullish breakout above US$1,200 seems to have ignited the entire commodity complex with resources stocks and all things associated with the China and growth being bid higher. Also, gold in AUD terms is showing significant upside momentum, boosting the likes of Newcrest Mining and Lihir Gold which finished higher by 5% and 4.2% respectively.

Outside of the gold names, sector heavyweights BHP and Rio Tinto finished higher by 1.4% and 3% respectively, while Orica, Alumina and Fortescue all closed stronger between 0.7% and 1.7%. The sector was the day's best performer, finishing 2.1% higher.

Bluescope Steel added 2.8% after some bullish comments on the steel sector and its own valuation prospects by Goldman Sachs. Also, news that it plans to complete a second metallic coating line at its Cilegon plant in Indonesia and more than double output for a further US$40 million because of rising local demand helped the stock rise. The plans will boost the Asia-Pacific network of facilities, which are unmatched by other regional steel makers. CEO Paul O'Malley flagged the move at last month's AGM. BlueScope also looking at restarting its metallic coating line in Thailand, he said in November. Cilegon currently makes 100,000 metric tons a year of metallic coated steel and 40,000 tons of painted steel. With new plant, total combined capacity will rise to 265,000 ton a year of metallic coated and 160,000 tons of painted steel, the company said.

The energy sector was also a standout performer, rising 1.2% following overnight gains in Crude Oil futures on the back of a weaker US dollar and manufacturing data that showed the world's two biggest oil consuming nations, the US and China were continuing to expand. WorleyParsons and Oil Search were the two top performers, both adding 2.4% while heavyweights Woodside Petroleum and Santos rose 1% and 0.5%. On the downside, Caltex lost 1.4% after the ACCC opposed its planned $300 million acquisition of Exxon Mobil's Australian petrol stations.

The return of risk appetite also saw the industrial sector post a 0.6% gain for the session. United Group finished higher by 0.7%, Leighton Holdings continued to shrug off it association to Dubai which plagued it earlier in the week, closing up 1.1% while Qantas benefitted from broker talk it was undervalued against its Asian peers, settling higher by 1.9%.

The financials also chipped in with gains of 0.4%, underperforming the broader index following relative underperformance from US peers. AMP and AXA added 2.1% and 1.9% while Commonwealth Bank of Australia and National Australia Bank finished the session higher by 1.6% and 0.9%. Westpac Banking Corporation and ANZ rounded off the big four banks with gains of 0.4% and 0.6%.

In a report from Southern Cross Equities they believe Westpac's aggressive mortgage rate increase, in response to RBA tightening yesterday, increases regulatory risk in the sector. The simple fact is the move will bring unwanted legislative and regulatory attention to a sector that is still benefiting from government support, noting that Australian banks still benefit from the government deposit guarantee and guarantee on foreign wholesale funding. This move by Westpac will ensure federal government support for new banking sector competition and the quickest way to ensure that is a levelling of the fees on the wholesale funding guarantee in favour of regional banks. The broker favours regional banks who could be used as the entry vehicle into Australia by a foreign bank, including Bank of Queensland, and supported by a flattening of the fees on the wholesale funding guarantee.

Also, in a report from Royal Bank of Scotland, the broker believes yesterday's strategy briefing successfully highlighted the upside potential of its Asian businesses, but notes management seems to be slightly exaggerating the strength of its existing franchise in South East Asia. The broker believes Malaysia and Singapore require a fair few acquisitions to gain real scale, while it's Australian business remains sub-scale with margins below those of its peers and much of the positive story appears system-based rather than AXA specific. However, noting the synergies available to AMP and the clear attraction of Asian growth for AXA SA, the broker believes a higher joint offer from the suitors is likely. It retains its ‘hold' rating with a $6.00 target price.

Prices are in AUD unless otherwise stated.
IG Markets Ltd, Australian Financial Service Licence No. 220440. ABN 84 099 019 851.
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