ASX CLOSE: Investors offload anything risk associated

Friday 5th February 2010

In Asia, regional markets have slumped after concerns over European sovereign debt and an unexpected increase in US jobless claims saw markets pummelled overnight. This trend has continued in Asia with the Kospi hit the hardest, currently down 3.5%. Elsewhere, the Hang Seng, Nikkei and Shanghai Composite are lower by 3%, 2.9% and 1.8% respectively.

In Australia, it was an ugly picture. The ASX 200 closed 2.3% weaker at 4514.3 having oscillated around the crucial 4500 level for much of the session. The cyclical sectors like materials, energy and financials did most of the damage as investors offloaded anything associated with risk.

Yesterday, we asked whether it would be the bears or the bulls who took control of the market. Clearly, the bulls gave up the fight very easily, sending global markets spiralling lower.

Price action is looking increasingly bearish as markets are now making lower highs and lower lows on decent volumes. Psychology has changed with traders now looking to sell rallies rather than buy dips.

The market is a supply and demand game, and at the moment supply is outweighing demand, for whatever reason.

Although many are calling the market ‘cheap' on valuation grounds, this doesn't necessarily mean it's going up anytime soon. This will not come until the demand from value driven buyers exceeds supply. The question is at what point does this occur? Is it 4450 or 3850?

At the moment, much like the bear market, participants are not interested in hearing how ‘cheap' something is on a valuation basis.

In economic news, JPMorgan believe an interest rate hike from the RBA won't be coming in March, even if economic numbers continue to point to one. The broker said it's not financial market jitters or sovereigns that kept them on hold; it's about getting clarity before more rate hikes. Given this, JPMorgan doesn't think the RBA can just roll out a rate hike in March. If that's what the RBA wants, they'll have to wait six or seven weeks until they get more information on consumers.

After commodities were smashed overnight, materials were once again the biggest percentage decliner falling 3.7%. Major miners BHP and Rio Tinto where hammered, closing out the day weaker by 3.5% and 5%. Gold's US$40 plus fall overnight had disastrous consequences for the gold miners with Lihir Gold and Newcrest Mining finishing weaker by 4.2% and 2.6% respectively.

In a broker note from Credit Suisse, BlueScope Steel's (-4.5%) FY10 net profit forecast was boosted to $151 million from the previous $121 million. This was on the back of revised forecasts for iron ore, coking coal, scrap and steel prices. However, FY11 estimates were trimmed to $507 million from $530 million and FY12 forecasts to $738 million from $763 million. The broker kept it's ‘outperform' rating on the stock, with a price target of $3.73.

Also, in the same report OneSteel (-3.1%) was upgraded to ‘neutral' from ‘underperform', with its target price increased to $3.65 from $3.26. This was after upgrades to iron ore, coking coal and scrap and steel forecast prices for 2010. The broker notes that while OneSteel offers strong leverage to rising raw materials costs, steel prices should also rise to recover the global average cost impost. Given this, OneSteel should enjoy ‘double leverage' with steel making margins and iron ore margins expanding.

Significant points were also detracted by the financial sector which closed lower by 2.2%. All four major banks ended the session lower between 0.5% and 2.5%, while Macquarie Bank which outperformed the market yesterday to finish higher, gave back all its gains and then some, ending down a massive 5.6%.

Crude's 5% pullback overnight saw the energy sector close weaker by 3.7% with major energy plays Woodside, Santos, Oil Search and Caltex all falling between 3.9% and 5.7%. Yesterday's big decliner Karoon Gas saw more modest losses, ending down only 1.4%

Once again, the retailers featured heavily in today's trade. Bellwether names David Jones, Myer, Harvey Norman and JB Hi-Fi were all down between 0.9% and 3.4%, with Myer the worst performer despite a solid result from Harvey Norman.

The retailer said 2Q sales in Australia rose 6.8% from a year ago. On a like-for-like basis, Australia sales rose 6.5% during the quarter. That's a pretty encouraging sign for the retail sector after both Woolworths and Myer reported disappointing results for the same period, which covers the key holiday shopping season. It appears investors were hoping Harvey Norman would upgrade their guidance but that wasn't the case. Rather, management reiterated expectations for pre-tax profit to rise by more than 40% for the six months to December 31. With strong sales but no upgrade to earnings guidance, the question of how margins are holding up remains. Myer said discounting was deeper than usual during the holiday season, but Harvey Norman didn't comment on that issue in its results.

Prices are in AUD unless otherwise stated.
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