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IG Markets Australian Market Wrap

Fuseworks Media
Fuseworks Media
IG Markets Australian Market Wrap

Good afternoon,

Asian markets are mostly lower this Wednesday following the relatively subdued leads from Wall St. The Nikkei 225 is the best relative performer, down 0.2%, its third straight fall. Elsewhere, the Kospi, Hang Seng and Shanghai Composite are all weaker between 0.3% and 1.6%.

In Australia, the ASX 200 closed the day 0.8% weaker at 4648, its lows of the session. The reaction of equities to the cooler-than-forecast consumer inflation data was quite muted but a futures crash at the SFE saw sharp losses as trade resumed, with investors questioning the integrity of the trading platform. Clear winners for the session were the telecoms and financial sector, with the latter benefitting from a better-than-expected result from NAB. The industrials, materials, consumer staples and energy sectors all dragged.

It was an unusual situation today where falls were likely based on systemic issues rather than any fundamental reasons. In previous sessions where movements have been the result of economic data or currency moves, today's fall would seem to be an aberration and should correct itself once credibility and trust in the systems return.

It was made even more puzzling by the fact that one would have thought cooler inflation would have been equity market positive. Today's softer CPI read vindicates the RBA's views on inflation and would seemingly buy them at least one more month to mull the ramifications of next week's FOMC meeting.

Futures markets would seem to confirm this view, with the chances of a rate rise dropping to around 16% from 51% earlier. Unsurprisingly, the AUDUSD has come under heavy selling pressure, dropping from 0.9863 to now be trading around the 0.9720 level. It will be interesting to see the reaction from Europe later this afternoon.

In a note from HSBC, it said the reading was weaker at first glance, but housing and import components indicate an interest rate hike from the RBA could still be on the cards next week. On the other hand, a comment from Macquarie said inflation in Australia is under control and the RBA has no urgency to tighten policy. Macquarie believes policy makers will likely wait and see what the Federal Reserve Board has to say next week, before possibly mulling a move in December. The broker continued, saying previous rate hikes are hitting the target, with inflation right in the middle of the Reserve Bank's target band.

On the equity market, the industrial and material sectors were the worst performers, down 1.9% and 1.6% respectively. Toll Holdings & Asciano did most of the damage among industrial names, down 6.6% and 4.3% after Toll's Managing Director Paul Little announced he would be retiring in January 2012 and that an orderly succession to a new Managing Director would begin. Asciano suffered too after saying the volumes of coal hauled in the September quarter were lower than expected, while container ports volumes fell 1.3%.

Elsewhere, James Hardies, Brambles and Leighton Holdings were all down more than 2.4%.

Fortescue Metals, Newcrest Mining, Bluescope Steel, Rio Tinto and BHP Billiton were all lower between 0.8% and 4.6%, with Fortescue the worst performer. The stabilisation and rally in the US dollar has seen profit takers looking to lock in gains on recent outperforming commodities like copper and zinc.

In a broker note from Morgan Stanley, it has resumed coverage of BHP with an overweight rating after compliance silence during the Pilbara JV. The broker said it is relaxed about the risk of BHP Billiton overpaying for Potash Corp. of Saskatchewan, arguing the scenario is already incorporated in its share price, which "has been lagging its global peers since the announced takeover offer". Morgan Stanley believes a Potash deal priced at up to US$160/share is already in BHP's share price, vs BHP's US$130/share offer. Should BHP be successful in acquiring Potash, MS said it would expect the debt used to fund the transaction to be paid off within three years or less. Morgan Stanley continued, saying should BHP be unable to acquire Potash, it thinks BHP would start to return excess capital to shareholders, which would yield 14% for shareholders in the Ltd. stock and 16% for the PLC stock.

Energy names also saw selling pressure, with the likes of Macarthur Coal, Caltex, Whitehaven Coal, Santos and Oil Search all down more than 1.5%.

The financial sector managed to outperform on a relative basis, finishing the session largely unchanged. National Australia Bank was the best performer, up 2.1% after FY earnings topped market expectations; a FY cash profit of $4.6 billion ahead of the $4.49 billion average expected. The final dividend of 78 cents was also ahead of the market's forecast of 76 cents a share. While that could drive interest in the shares, the fall in group revenue, which came in at $17.01 billion, down 1.4% on year, underscores a major issue for the sector. NAB's big rivals, ANZ Bank which reports tomorrow and Westpac, are also likely to report they've lost revenue momentum. CEO Cameron Clyne signalled the group won't be targeting any big acquisitions after its play for AXA Asia Pacific fell over. Clyne told reporters that while he sees potential for some "small bolt-on" deals, he is "very comfortable with an organic growth strategy". He said there's clearly potential for small bolt-on activities in our asset management and perhaps in our US business but fundamentally we see 2011 as presenting a lot of organic growth opportunities. Many in the market have interpreted The Australian Competition and Consumer Commission's move to block NAB's takeover of AXA APH as a sign the regulator doesn't want to see any more big deals involving the big four banks.

Elsewhere, ANZ and Westpac both added 0.8% while CBA fell 1.3%.

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