ASX Close: Banks beat miners

Monday 18th January 2010

The ASX 200 managed to close in positive territory, finishing 0.2% higher at 4911.1 after this morning trading as low as 4865.6.

Gains were driven by strength among the big four banks, helping the financial sector offset broad based falls, especially among the big miners.

Before the open we thought it was going to be a tug-of-war between financials strength and materials weakness. However, the market was firmly in the red for most of the morning session as traders focussed on the bearish offshore leads rather than.

It's a busy week on the reporting front. Locally, there are plenty of production reports due and in the US Q4 reporting will kick off in earnest. Given last week's price reaction to reports from the likes of Alcoa, Intel and JPMorgan, it appears we're in for a tough couple of weeks. The earnings and expectations bar seems to have been raised very high. A flat result for the US earnings season would probably be a good outcome at this point.

It was always going to happen. Last year we saw stupidly easy gains during the quarterly reporting seasons as expectations were just too low and it proved very easy for companies to post ‘better-than-expected' results. Now it looks like we're seeing the opposite.

In economic news, the Australian TD Securities-Melbourne Institute inflation gauge rose 0.3% on month for December, indicating that price pressures are beginning to rear their head. However, it unlikely to be enough to scare the RBA into upping their pace of rate hikes. TD Securities Senior Strategist Annette Beacher said "After a period of clear disinflation over the year from mid-2008, inflation has now not only bottomed out, but early signals suggest some emerging upside pressure". Official price data is due to be released on January 27.

Turning our attention to the market and it was the financial sector which added the most points. The sector closed 1% higher, propelled by strong gains among the banking stocks following Commonwealth Bank's profit upgrade late Friday. ANZ was the best performer, up 3.3% while Westpac and National Australia Bank finished 2% and 0.7% stronger. CBA gave up some of Friday 2% rise, losing a modest 0.1%.

IOOF Holdings was one of the top ASX 200 performers today, rising 7.1% amid speculation that they could become a takeover target, after the Age newspaper reported over the weekend that IOOF has held preliminary talks with ANZ Bank. While there seems to be some scepticism, a number of analysts see merit in a deal, which report says could be funded through a combination of cash and shares.

The consumer discretionary (0.2%) and industrial (0.1%) sectors added modest points. Fairfax Media was the standout among discretionary names, rising 4.5% while Toll Holding and Macquarie Infrastructure Group were the biggest gainers in the industrials sector, finishing 3.5% and 2.4% stronger.

On the downside, the materials sector detracted the bulk of the points despite some bullish commodity reports. The sector lost 0.4% with Fortescue Metals Group, BHP Billiton and Rio Tinto all finishing down between 0.4% and 1.7%.

Lihir Gold added 0.9% after the surprise departure of CEO Arthur Hood this morning. The departure sparked speculation the resignation could be linked to the company's acquisition of Ballarat Goldfields in 2007, which turned out to be a poor choice. The Ballarat mine is currently up for sale after disappointing results. In a note from Credit Suisse, investors are unlikely to take the departure negatively given 2009 production has been confirmed in line with guidance. The broker believes Lihir has carried the risk of further acquisitions, diluting investors' exposure to flagship Lihir mine. Under Hood's leadership and the chairman Ross Garnaut, acquisitions have destroyed shareholder value. This risk may now have changed but we would like to see changes at board level before becoming too confident. Credit Suisse kept their $3.00/share target and ‘underperform' rating. Our constrained outlook for the gold price during 2010 limits the potential of Lihir Gold but it remains a clean gold price exposure for believers in the metal.

In another interesting report, a commodities report from Macquarie Group described the coking coal market as tight, with spot prices edging upwards in increments on the back of strengthening demand, decreasing coke stocks, and ongoing logistics constraints.

The broker said 2010 looks set to be a very strong year for the sector. While China is no longer importing coking coal at 55million tons/year (the rate they were producing at during mid 2009), levels haven't dropped below 30 million tons/year in recent months.

Macquarie expect China to continue to import hard coking coal material through 2010 at similar levels to current, given the ongoing steel production growth, which should be matched but not exceeded by higher output from Shanxi mines.

The seaborne supply chain is under pressure to deliver growth (although the capacity of market to do so is limited) with the short-term focus on Australia and the US to push more material through the ports. Macquarie Group believe that an extra 12 million tons of Australian and 10 million tons of US material can be realised, however the logistics chain will be extremely tight under this situation and subject to disruption from unforeseen events.

They reiterated their forecast of $180/ton for 2010-11 contract hard coking coal prices. Miners to benefit include BHP Billiton (through its BMA joint venture), MacArthur Coal and Xstrata.

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