ASX CLOSE: Market falls led by materials and financials sectors

Wednesday 21st October 2009

Across Asia, most of the regional equity markets are lower this Wednesday, led by materials and technology companies following a night of weaker-than-expected US economic data. The Nikkei 225, Hang Seng and Korean Kospi are all down between 0.1% and 0.2%, with the Kospi the biggest decliner. The Shanghai Composite has just moved into positive territory, currently higher by 0.2%.

In Australia, the ASX 200 was down 0.2% at 4838.6, led by weakness among the materials and financials sectors. We managed to outperform US leads on a relative basis in very quiet trade due to a complete lack of selling conviction and the relentless deployment of fresh, sidelined cash.

That the market was only down marginally is testament to the "buy on dips" mentality and the belief that the current uptrend in equities remains very much intact. While materials were the weakest performer over the session, the orderly drifting in prices suggests the market has one eye on China's September economic data due out tomorrow which is expected to confirm China's growth is tracking well ahead of previous estimates, with a resulting rebound in equities very much on the cards should this prove the case.

Also, momentum in the financials space has slowed over recent weeks as the market approaches full year earnings reports due next week. While no big surprises are expected, recent share price appreciation means the easy gains are likely over.

With the expectations bar set so high, it's becoming increasingly difficult to excite the market. Just meeting expectations isn't cutting it, company's need to smash on earnings to spur further upside.

As mentioned above, the materials sector detracted the most points from the market today, finishing -0.4% lower for the session following weaker base metal prices overnight due to a bounce in the US dollar. Orica (-2.3%), Lihir Gold (-1.2%), Fortescue Metals Group (-1.2%), Newcrest Mining (-0.7%), Rio Tinto (-0.3%) and BHP Billiton (-0.2%) all finished in the red. The big news for the session was BHP Billiton's release of its quarterly production report.

BHP Billiton's 1% rise in 1Q iron ore output to a record 30.1 million metric tonnes was slightly below market expectations following the strong reports from Fortescue Metals Group and Rio Tinto, which posted 12% growth on year. It said its 6 October accident at Olympic Dam will see it producing at about 25% capacity until third quarter 2010, which looks inline with analyst's expectations and will have some impact on an already tight copper market.

Royal Bank of Scotland analyst Warren Edney said "BHP Billiton's 1Q iron ore and coking coal output came in slightly lower than expected but the petroleum division has posted strong output growth. I thought iron ore might surprise on the upside and it didn't do that, and the same goes for metallurgical coal. However, the iron ore operations were affected by the tie in of expansion projects and that Rio Tinto experienced similar impacts when it was completing its Pilbara iron ore expansions".

Also, Merrill Lynch boosted its iron ore price forecasts and believes the market to be undersupplied in 2010 and 2011. It said "it now expects prices to rise 15% in the 2010 Japanese financial year compared to previous forecasts of 10%. In 2011, it predicts another 15%, up from 5% previously. The market should be in an undersupply of 24 million metric tons in 2010 and 55 million tons in 2011, driven by stronger than expected Chinese demand. This is a significantly tighter market than the one we were forecasting in the beginning of the year".

The financials sector was also a major detractor, down 0.5%. The likes of AMP (-2%), Suncorp-Metway (-1.5%), Westfield Group (-1.3%) and Macquarie Group (-1%) led the sector south while three of the big four banks were down between 0.3% and 0.9%. ANZ managed a gain of 0.2%.

In the consumer staples (-0.5%) sector, Woolworths was the biggest decliner, losing 1.6% as Credit Suisse downgraded it to ‘neutral' from ‘outperform' mostly on valuation grounds after yesterday's Q1 sales result. It said "Woolworths rallied strongly into the 1Q result and we see few further catalysts for outperformance in the short term. Still, the group's fundamentals remain strong and despite some market disappointment over yesterday's result it remains a very reliable profit generator. On a relative basis, Woolworths seems likely to outperform Wesfarmers due to an expected weak retail result at the Wesfarmers investor briefing on Friday".

On the upside, the consumer discretionary sector had a solid day, adding 0.5% with the likes of Aristocrat Leisure (2.7%), Ten Network (1.6%), Fairfax Media (1.4%) and David Jones (1.2%) all contributing to gains. The media stocks were boosted by Merrill Lynch reiterating its call for further upside potential over the next 12 months.

It said "with increasing evidence that this ad cycle bottomed in May/June/July, focus has understandably shifted to mid-cycle earnings. We are very confident that the ad markets in Australia and NZ have bottomed. We have raised FY11 forecasts across the sector by an average of 4%-7% and boosted target prices across the sector.

We've raised Austar's target by 12% to $1.45, Fairfax by 12% to $1.90, WA News by 27% to $8.45, APN News by 34% to $2.55, Seek by 16% to $6.95 and Ten by 6% to $1.65. We have a ‘buy' rating on all stocks, including Consolidated Media and Austereo but reiterate our ‘underperform' rating on Seven".

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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