ASX CLOSE: Market gains, financials disappoint

Wednesday 10th February 2010

Across Asia, regional markets are mixed this Wednesday following a strong overnight lead and reports Germany may head the effort to help Greece's debt problems. The Shanghai Composite and Nikkei 225 are the best performing markets, up 0.7% and 0.6% respectively while the Hang Seng and Kospi are both down 0.1%.

Locally, the ASX 200 finished 0.2% stronger at 4513.4, well off its earlier highs of 4570.7. Whilst the cyclical growth sectors like materials and industrials continued to lead the market, they were significantly off their session highs.

We thought overnight developments and the better-than-expected reports from heavyweights BHP Billiton and Commonwealth Bank of Australia would have garnered enough support to make early gains stick.

Companies boosting dividends and giving positive comments on earnings, along with a rebound in risk appetite all pointed towards a positive day's trade, yet the market still couldn't maintain gains.

This now all too familiar ‘retreat from the highs' is very negative indeed, especially given the good leads. It seems the ‘sell into strength' theme is becoming further entrenched in investor psyche.

Rather than just speculation and rumour of EU action, it seems the market wants concrete evidence of a support package before it's willing to move past these concerns.

In economic news, Australian consumer sentiment slipped 2.6% in February, with consumers seemingly worried about higher interest rates. They believe the central bank will go back to raising rates soon. However, if sentiment continues to deteriorate and in light of signs Christmas sales were weak, a consumer cool down might keep the RBA from hiking in March.

Turning our attention to the market and it was the financial sector which really dragged today.

The financials (-0.6%) were a major disappointment despite what appeared to be a solid 1H result from Commonwealth Bank. Early advances in the stock were eroded as the market seemed to focus on its slightly less-than-expected dividend increase, with the stock settling 1.7% lower.

The bank's first-half result was marginally ahead of expectations with 1H cash profit coming in at $2.94 vs $2.91 billion. While the 6% rise in dividend was nice, it may be toward the bottom-end of expectations. Whilst these are all positives, we don't see them as the main drivers. Of more interest will be the 19 basis point increase in interest margins, solid return on equity, and the comment that bad debt charges have peaked. The question will be, does the result justify the premium at which CBA trades to its peers?

The sell down in CBA spread across the sector with the other four major banks all weaker between 0.6% and 2.3%. Macquarie Bank had another dirty day finishing lower by 0.9% after yesterday's 6.5% smashing.

Elsewhere, QBE Insurance Group rose 1% after it was upgraded to ‘buy' from ‘neutral' in a note from Merrill Lynch, with its price target increased by 2% to $24.50. The broker noted that after underperformance against insurance peers and the broader market since the beginning of 2009, QBE is now near the bottom of its expected trading range and appears well priced, despite medium-term risks around the weakening insurance premium cycle and other macro factors. Merrill believes an earnings disappointment at FY10 results on February 26 is unlikely, given the improvement in business conditions since QBE's update in November.

Despite a gain of more than 3% in Crude Oil futures overnight, the energy sector was flat with heavyweights WorleyParsons, Woodside Petroleum and Oil Search all down between 0.4% and 1.2%.

Despite a gain of 0.8%, the materials sector was a definite disappointment. Its failure to sustain earlier gains on the back of strong overnight leads was a very negative sign and clearly suggested the current bearish sentiment will not easily be overcome. BHP, having traded more than 3% higher earlier in the day after a better-than expected profit result, completely rolled over to finish the day higher by just 0.1%.

BHP's first-half profit obliterated expectations this morning with net profit coming in at US$5.7 billion vs consensus forecasts of between US$5.1 - US$5.3 billion. The dividend of 42c was roughly in line with expectations, while the outlook appeared more upbeat than anticipated. The comment that ‘supply may struggle to keep pace with demand' will garner a lot of attention as it bodes well for higher sustainable commodity prices. Also, the fact that the result was driven by higher volumes as opposed to higher prices should please the market. Expectations for a buyback have petered out recently, so the lack thereof is unlikely to negatively impact the stock's performance.

Its counterpart Rio Tinto did manage to hold onto gains of 1.4% but was again well off earlier highs of more than 4%. This scenario played out across numerous names in the resources sector.

Interestingly, confidence seems to be returning to commodity markets after reports indicated the EU are considering plans to help Greece out of its debt crisis. Commodity Broking Services in a report said this is the band-aid necessary to help resolve concerns overhanging the market and that the EU's comments that it would help Greece are giving CBS the basis for a solid recovery. The broker also said that BHP is riding on the back of China and to some degree India. As long as China continues, all is said to be well.

In other stock specific news, Boral (4.4%) reported a 1H net profit that fell by 9% on year to $67.9 million, less than market had expected. Consensus was for $52.7 million, according to a median forecast of five analysts polled by Dow Jones Newswires. Boral anticipates FY profit to be broadly in line with consensus, which is currently at $123.5 million. 1H dividend was 7 cents, which was down from a year ago, but above the expected 6 cents. New CEO Mark Selway said the Australian housing market is showing signs of recovery, but that's being offset somewhat by a significant downturn in commercial non-dwelling work. Conditions in the US remain challenging, although the housing market appears to have bottomed at an annualised rate of 570,000 starts in 1H, which is over 60% below the 50-year average.

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