ASX CLOSE: Positive lead from US push markets higher

Tuesday 20th October 2009

Markets are all in the green across Asia today following a strong night of Q3 results in the US that boosted earnings expectations and leaked news from China that its growth for the nine months to September will be greater than 7%. The Nikkei 225 and Shanghai Composite are both up 0.8% while the Hang Seng and Kospi are 0.8% and 0.5% higher, respectively.

In Australia, the ASX 200 rose 1.1% to 4846.2, off earlier highs of 4871.3. Gains were widespread with the bulk of points coming from the materials and financials sectors. The lead from the US was very positive with the weaker US dollar helping commodity prices and stronger-than-expected Q3 reports from the likes of Apple and Texas Instruments reflecting improving consumer sentiment.

The bulls are still very much in control of this market. Yesterday's pullback, which gave up half of last week's gain, was on pathetic value of just $3.8 billion. With more than an hour still to trade, we're almost above yesterday's total volume which is a positive sign. The appetite for cyclical stocks leveraged to the economic recovery doesn't seem to have waned and they are continuing to drive the market higher.

With oil recently breaking out above the $75 mark, it's likely we'll begin to see upward re-ratings of this sector as increased demand forecasts begin to filter through and more and more people actually start believing in the recovery.

Woolworths Q1 2010 sales numbers came in weaker-than-expected and has seen the stock trading 1% lower. The market had been looking for 5% growth in group sales so it was definitely disappointed. Yesterday's 2.5% gain had the stock priced to perfection so the slight earnings miss is driving the selling pressure. The stock has underperformed both the market and Wesfarmers year-to-date and is likely to continue to do so as sharp upward re-ratings are unlikely following this result.

Apart from a few local announcements, we're very much trading on the back of US leads at the moment thanks to their Q3 reporting season. While this is doing a great job of boosting sentiment, the central theme to this whole rally has been the weaker US dollar, and it continues to fall lower.

Turning our attention to the market and the materials sector was the best performer, rising 2.1%. A weaker USD overnight saw base metals spike sharply higher providing the impetus for the sector's advances. BHP, Rio Tinto and Fortescue metals were all higher between 0.2% and 3.4% while gold names also saw renewed buying interest with gold trading above US$1065. Newcrest Mining and Lihir Gold finished higher by 0.4% and 1.3% respectively.

Among other material stocks, UBS reiterated its preference for Bluescope Steel (4%) over OneSteel on a valuation basis. The broker said "applying US$890 a ton for blast furnaces and US$450 a ton for electric arc furnaces implies an enterprise valuation for Bluescope of $9.0 billion and for OneSteel of $5.9 billion. Applying current net debt and share count, and extracting the potential impact of Carbon Pollution Reduction Scheme, implies a valuation for Bluescope of $4.20 a share and for OneSteel of A$3.38 a share".

The financials sector was one of the best performers today, rising 1.1% despite being one of the weakest sectors in the US overnight. Perhaps a note from Royal Bank of Scotland reiterating its ‘overweight' stance on Australia's major banks spurred investors. It noted that share price gains have seen the banks restore their premium to global peers and said "with cautious outlook statements likely to dominate the upcoming reporting season, we believe the next share price catalysts could be three to six months away.

Among the stocks, Suncorp-Metway, despite a broker downgrade and Bendigo & Adelaide Bank were the two top performers, rising 2.6% and 2.9%. Elsewhere, the big four banks were up between 0.2% and 1.4%, with National Australia Bank the top gainer.

Deutsche Bank downgraded Suncorp to a ‘hold' from ‘buy' based on its valuation, although it raised its target price to $10 a share from $8.50. The broker said "on a longer term view, Suncorp still has appeal on three main fronts - transformation under a new CEO, bank leverage to the improving economy and surplus capital generation. However, after hitching a ride on the bank share rally in recent months, it has moved beyond the point where we can argue that unrealistic valuation discounts are being applied to its stressed businesses".

Prices are in AUD unless otherwise stated.
IG Markets Ltd, Australian Financial Service Licence No. 220440. ABN 84 099 019 851.
This information is provided for information purposes and should not be regarded as financial product advice. This information does not take into account your specific objectives, financial situation or needs. Therefore you should consider the information in light of your specific objectives, situation or needs before making any trading or investment decision. IG Markets recommends you take independent financial advice before any decision whether to trade with IG Markets in the products we offer.

Comments from our readers

No comments yet