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ASX Close: Defensive sectors outperform on quiet day

IG Markets Ltd

Monday 25th January 2010

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The ASX 200 finished 0.7% lower at 4717.9 after trading as low as 4679.9 earlier this morning. As expected, the typically defensive telecommunications, healthcare and consumer staples sectors outperformed. The materials space, however proved very resilient, only down 0.5%.

We started to see buyers willing to step back into the market today which was a very encouraging sign. Participants are starting to realise that the concerns in the US will have very limited impact on Australian firms.

This pullback has created a number of very attractive opportunities. From a valuations perspective, the market is back in line with the long running average. Judging by how some of the material names faired today, traders are happy to buy the recent weakness.

The next two nights session's on Wall St will be crucial in determining whether or not this is just a minor pullback or whether sentiment has been damaged enough to see it continue lower.

Turning our attention to the market and the Australian market really outperformed US leads, perhaps partially helped by light trading volumes ahead of Australia Day tomorrow. 

As expected the financial sector was biggest decliner, losing 1.2%. Bendigo & Adelaide Bank was the worst performer, finishing down 2%. The big four banks all finished in the red too, down between 1.8% and 0.7% on the back of the continuing negative sentiment in the US. Westpac was the worst performer. 

Following the planned legislation from the White House to tighten the leash on US banks, Deutsche Bank said "whilst this legislation would have a material impact on some international banks if passed through the Senate, the actual impact on Australian banks is likely to be relatively small even if it is enacted globally. Australian banks do not own, invest or sponsor hedge funds in a meaningful way, nor do they undertake large proprietary trading operations outside of liquidity management. If similar legislation is introduced in Australia, the impact for Macquarie Group would be more significant, with the investment bank likely to be split from parts of the banking division."  

QBE Insurance Group lost 0.7%. In a broker note from Deutsche Bank, QBE was downgraded to ‘hold' from ‘buy' after adjustments to currency forecasts saw a 3.7% cut to FY10 EPS forecasts for FY10 and a 4% reduction in the target price to $24.00 from $25.00. The broker said while QBE should remain a core portfolio holding, short of a major accretive deal in 2010, Deutsche Bank feels price upside is somewhat limited over the medium-term.        

The consumer discretionary sector had a weak session, losing 0.9% as the likes of JB HiFi, News Corporation and Harvey Norman were all down between 1.5% and 2.4%.

The energy and material sectors managed to rally strongly from their morning lows. The energy space lost 0.6% with Origin Energy and Caltex the biggest weights, down 1.5% and 1.7% respectively. Woodside Petroleum fell 0.8% after having its price target cut by UBS. The broker lowered their 2009 EPS forecast by 12.6% after removing the forex gain on USD debt translation from underlying profit numbers. UBS said Woodside's 4Q09 sales revenue was 12% above their forecasts, with production in line. They maintained their ‘buy' rating as Woodside has attractive drilling upside from their 20-plus well Greater Pluto drilling program, which is expected to run throughout 2010 and into 2011.

The materials sector fell 0.5% with Amcor and BHP Billiton doing the most damage, closing down 1.5% and 1.1%. However, both Alumina and Rio Tinto finished in the black after opening lower. They were up 1.8% and 0.6%. Elsewhere, a lot of the other mid-tier miners rallied hard during the session. The best example was probably Murchison Metals, rallying 8.4% from its low to finish at $2.41.

Interestingly, a note from Barclays Capital said that copper is now hovering on confluence of support around the gap of $7,040 to $7,170, which ideally should hold firm early this week. If this gives way, Copper's price will extend its bearish bias, possibly towards the $6,500 or lower. A rally to above $7,590 is needed to return focus to the topside, though they see this as an unlikely scenario this week.



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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