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ASX Close: Investors head for the door

IG Markets Ltd

Friday 29th January 2010

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The  ASX 200 closed 2.2% lower at 4569.6, barely above the low of the day. After glimpses of buying yesterday, we were quite surprised to see support at 4600 break this morning. As the session wore on, the pace of declines increased as investors headed for the door.

The fact this support broke with such little resistance shows how negative sentiment currently is. We thought there would have been some buyers around the 4600 level, but this was blown away.

A lot of people are confused and looking for a reason behind the selling. However, sometimes there isn't an obvious reason - markets can just fall under their own weight due to a lack of buying.

In the final quarter of 2009, there were growing calls from market participants for a meaningful correction, which did not eventuate. We may be seeing this play out now, giving those that missed the boat last time an opportunity to enter the market.

The market just seems to be in a bearish mood because good news on US earnings is being ignored and the slightest bit of negative news is jumped on.

In economic news, mortgage growth in Australia showed little sign of cooling, with demand for loans continuing to grow at a strong pace in December. Policy makers aren't likely to be overly pleased by the numbers, but with rates expected to go higher in coming months, the demand for home loans may ease. On-year housing credit growth of 8.2% in December is an illustration of the challenges facing the RBA when trying to head off the risk of an asset bubble. The RBA meets next week and is expected to lift rates by 25 bps to 4.00%.

Focussing on the market and it was a very bleak day for equities. All sectors apart from utilities finished in the red, with the cyclical, high beta names the worst performers.

The material sector plunged, especially late in the session, finishing the day down 3.4%. Alumina was the biggest faller, down 6.2%. The big miners were hit hard with Rio Tinto, Lihir Gold, BHP Billiton, and Fortescue Metals Group all down between 2.4% and 4.8%, with Rio Tinto underperforming the most.

BHP Billiton this morning approved the US$1.93 billion iron ore expansion for its Rapid Growth Project 6 in the Pilabara. In a note from Macquarie Group, they said they see this as a positive move.

The broker said iron ore is one of BHP's best businesses, so "expanding in its own backyard", as chief executive Marius Kloppers has referred to it as is a positive. Macquarie said BHP has a strong balance sheet and expects US$21 billion in capital outflows including capital expenditure, dividends, other projects this FY. Also, in a note from Royal Bank of Scotland, they said BHP is demonstrating a company that has a lot of cash and a lot of options on where to spend it to generate returns to shareholders.

Still among materials and Macarthur Coal (-7.9%) was down heavily after an update on its $668.5 million friendly takeover bid for Gloucester. Macarthur said its three-pronged transaction of Gloucester as well as assets held by Gloucester's major shareholder Noble Group was now scaled back after talks for a majority stake in Donaldson Coal Holdings stalled.

However, talks to buy the remaining stake in the Middlemount joint venture progressed, with the stake valued at around $150 million. In a broker note from Patersons, they said the termination on the Donaldson negotiations means Macarthur will get fewer port and coal product diversification benefits from the transaction. Donaldson produces mostly thermal coal, which Macarthur lacks. Donaldson also has 11% stake in Newcastle Coal Infrastructure Group that would allow access to Port Waratah.

The industrial sector fell 2.2% as Macquarie Airports and Toll Holdings led the way south, falling 5.1% and 4.3% respectively. UGL fell 1.9% despite a broker upgrade. In a note from Macquarie Group, it was upgraded to ‘neutral' with a price target of $14.80. The broker notes that United Group provides exposure to the expected US economic recovery via its US services business, which is 15% of earnings.

They also note that the US facilities business has proven relatively resilient to the downturn, while the US property advisory business has been hit hard. The broker said at the same time, we see less risk now of the AUD moving to parity as the USD is likely to recover over the next 12 months in line with an improving economic outlook.

Elsewhere, the financial sector fell heavily, down 2%. Bendigo & Adelaide Bank was the biggest loser for the second straight day, down 3.5% while Commonwealth Bank of Australia didn't fare much better, losing 3.4%. The remainder of the big four banks were all weaker by between 1.2% and 2.9%.

Macquarie Group fell 1.7% despite an upgrade. In a report from Merrill Lynch, it was upgraded to ‘buy' from ‘neutral', with its target price upped by 16% to $70.00 from $60.60.

The broker said payoffs from recent acquisitions as part of the reshaping of its business, improved market conditions and staff productivity should help improve its returns on equity. Merrill's are comfortable Macquarie Group is now a cleaner play, while the lack of proprietary trading income and bank-holding company structure leaves us optimistic Macquarie Group can navigate the new rules proposed in the US. The broker lifted EPS forecasts 8% in FY10 and 12% in FY11, and now expects around 30% annual EPS growth through to FY12.

Energy stocks declined too with Woodside Petroleum closing the session 3.1% lower.

 

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.



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