ASX Close: Profit taking leaves ASX down

Tuesday 12th January 2010

In Asia, equity markets are mixed in afternoon trade as the US dollar gained versus higher-yielding currencies after an official from China Investment Corporation said the US dollar had likely seen its low and Alcoa's Q4 earnings missed analysts' expectations.

Japan's Nikkei 225 is the best performing market, higher by 0.7%. The Shanghai Composite is 0.3% stronger on the session while the Kospi has gained 0.1% for the session. The Hang Seng is down 0.5%.

In Australia, the ASX 200 Index finished 1% lower at 4899.5 after trading as low as 4893.1 earlier. Following solid gains over the past few weeks, some healthy profit taking moved into the market today. The materials, energy and financials sectors detracted the bulk of the points.

There's solid technical buying around the previous high of 4895. Consolidation above this level would be seen as positive.

Leads from overseas markets were uninspiring but it was the disappointment surrounding Alcoa's result which set the negative mood, especially for the materials sector. Some of the material names have had a very good run of late so it's not surprising (and very healthy) to see a bout of profit taking.

Reaction to the Alcoa result will be very interesting. It will help gauge market expectations and determine whether the earnings bar is set too high or too low.

The after hours reaction to Alcoa was a little puzzling. The market has said it will focus on top line expansion through earnings growth, which Alcoa achieved. However, participants chose to focus on the slight EPS miss and ignore the improved balance sheet.

A stronger US dollar is also weighing on risk appetite. If the US dollar strength carries through to trade tonight then we might see some pressure on dollar denominated commodity prices.

In economic news, Australian housing finance fell 5.6% vs an expected decline of 2.3% in November. The result likely reflects the effects of rising interest rates through the fourth quarter of 2009 and the steady removal of government stimulus to the housing sector.

Profit taking among the property trust (%), materials (%), energy (%) and financials (%) sectors dragged the broader market lower today.

Alumina, Bluescope Steel, BHP Billiton and Rio Tinto were the biggest fallers among material names, all down between % and %, with Alumina declining the most after Alcoa's result disappointed the market.

In a commodities report from ANZ, they revised their price forecasts for base metals upwards by 7-15% on improving steel markets and more confidence in OECD demand that has been highlighted by better US economic data. ANZ notes copper's fundamentals are the best of the sector.

Copper's the most strategic base metal for China, where there's a strong domestic demand profile, limited local supply and a tight global supply backdrop. ANZ also warns however, about the consistent gains in LME supply since July.

Concerns over high levels of stockpiled copper in China should be put in context. Reports that it could be as high as 300,000 tons are dwarfed by China's annual consumption of 7.3 million tons. So stocks equate to a short 2.2 weeks supply.

ANZ lifted its copper price forecast for 2010 by 8.9% to an average of $3.44/pound vs $2.34 in 2009

Also, in an earnings preview from UBS, it said Rio Tinto may beat its full year iron ore output guidance when Rio Tinto releases its 4Q production figures on Thursday.

In October last year, Rio Tinto upgraded its guidance for full year iron ore output to 210 -215 million metric tons on a 100% basis, up from 200 million tons previously.

UBS believes there is still some capacity for Rio Tinto to do better, especially noting a recent announcement that the Yandicoogina mine has hit a run rate of more than 50 million tons a year.

Rio Tinto upped its iron ore production forecast to 216 million tons on a 100% basis, which boosts its 2009 net profit estimate by 0.8% to US$5.8 billion. UBS maintains its preference for Rio Tinto over rival BHP Billiton for Rio Tinto's higher leverage to iron ore prices.

Also a US$10 per ton increase in iron ore prices is set to boost net profit for 2010 by 12% for Rio Tinto compared to only 5% for BHP Billiton. UBS rates Rio Tinto a ‘buy' with a $82 target price.

In the energy sector Paladin Energy was the main drag, finishing the session down % while Caltex Australia and WorleyParsons lost % and %.

Among financials, QBE Insurance Group and Westfield Group were the worst performer, losing 2.1% and 1.7% respectively while Westpac Banking Corporation and Commonwealth Bank of Australia finished flat and National Australia Bank and ANZ were down 1.1% and 0.6%.

In a report from Merrill Lynch on Bendigo & Adelaide Bank (0.4%), they believe consensus forecasts are underestimating the margin recovery likely to occur in FY10 for Bendigo and Adelaide Bank.

They reiterated their ‘buy' rating on the stock and notes the current consensus is for 15-20 basis point improvement in Bendigo's FY10 margin. Management recently noted that the year-to-date run-rate margin was running at around 27 basis points above the FY09 levels.

We note that if the October-09 run rate margin can be maintained for the remainder of FY10, then we estimate Bendigo will report a margin 32-37 basis points higher than in FY09. Currently, Merrill Lynch forecasts a 32 basis point improvement. They are now of the view that the major risk from the Great Southern's portfolio is "the potential for a below the line charge to be taken for litigation settlement, similar to that taken by the majors for their New Zealand tax exposures".

Elsewhere in the market, CSR Limited was the second best ASX 200 performer, gaining 4.3% after Chinese group, Bright Food announced it had approached CSR's board with a view to buying its sugar operations for around $1.5 billion.

In a note from Patersons, they think it's a sign of confidence that there is a trade buyer interested. It has been on the block for six months prior to CSR's demerger being announced.

Bright Food believes its potential offer, which would be in cash, is a much more attractive and significantly secure alternative than CSR's demerger plans. The approach demonstrates China's increasing appetite for Australian commodities outside mining assets. Bright Food's Vice President, Ge Junji, says the group is keen to invest in the Australian food industry, particularly sugar.

The company says it has written to CSR's Chairman, Ian Blackburne, and is hopeful of a "prompt and positive response".

Prices are in AUD unless otherwise stated.
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