ASX CLOSE: Market stages late rally

Monday 14th December 2009

Across Asia, regional markets are mixed despite the broadly positive leads from the last session of the US trading week. Concern about Yen strength and how it might impact company profits is weighing on the Japanese market, as are lingering concerns about what a stronger USD might mean for the risk trade. The Shanghai Composite is the regions worst performing market, down 1.3%, while the Nikkei 225 is lower by 0.1%. The Kospi and the Hang Seng are now in positive territory by 0.3% and 0.1% respectively.

In afternoon trading the ASX 200 saw a dramatic late day turnaround on breaking news that the Abu Dhabi government would provide US$10b in financial support to Dubai, including the US$ 4.1b needed for Nakheel's Islamic Bonds maturing today. Having traded to a low of 4608, and just above that level for most of the afternoon, the ASX surged into the close to finish higher by 0.4% at 4654.

Despite broadly positive leads from offshore markets, trading in Australia was always going to be heavily dictated by the performance of our major energy and materials names. While those sectors managed to eke out gains in the US session on Friday night, their heavier weighting on the ASX 200 index was always going to test our market's resilience given the renewed USD strength and fears about what this could mean for commodity prices.

For most of the session it was the financials, materials and energy sectors weighing on the market.

The late session bounce saw materials close out the day 0.6% higher. BHP and Rio Tinto ended stronger 0.4% and 0.5% respectively, while Alumina surged by more than 6.4% on news of an upgrade in production capacity at its refinery in northern Brazil. Alcoa was also up more than 8% in US trade with JP Morgan upgrading its price target on the stock to $25 from $22.

Elsewhere in the materials sector, Fortescue Metals (+2.1%) and BC Iron (+2.9%) were both higher after announcing their intention to move forward with the development of their Nallagine JV project.

There is no doubting that materials names have been on the nose since that better-than-expected November non-farm payrolls number really ignited expectations of rate hikes in the US by mid 2010.

The main concern seems to be that a higher USD will see a lot of money come out of the commodities sector which will in turn see a dramatic reversal of the equities rally we have seen since March. Friday's US session provided some hope this would not be the case.

Gold and oil aside, base metals were broadly stronger in offshore markets, in spite of USD strength which was pleasing to see as it didn't mean that a gradual rise in the USD (on the back of mounting speculation about increasing US rates) would necessarily mean a precipitous fall in commodity prices as some market observers had feared.

We certainly want to see a situation where commodities are being bought on underlying optimism in the strength of the global recovery and not just because they are cheap in USD terms. If the USD continues to rise it will not be long before we see how this plays out.

The late rally could not help the energy sector finish in positive territory with the sector down 0.4% for the day.

Across the energy space, the news of the day was Woodside placing itself in a trading halt as it embarks on a $2.5b capital raising to improve its balance sheet strength and liquidity ahead of further advancement of its Pluto, Browse and Sunrise LNG projects. Via an underwritten entitlements offer, shareholders will be entitled to buy 1 new share for every 12 held at a price of $42.10, which represents a 10.8% discount to the last traded price of $47.18.

The already susceptible energy sector certainly copped the double whammy of crude prices sliding below US$70/barrel and Woodside seeking to raise $2.5b in fresh equity, with investors undoubtedly reshuffling their holdings to raise cash to take up their Woodside entitlements. While Woodside remained in a trading halt, major names Oil Search, Santos and Caltex finished lower by 0.5%, 1.4% and 2.8% respectively.

The financial sector turned around earlier losses to close higher by 0.2%, with the major banks finishing mixed. Westpac and Commonwealth Bank both closed higher by 0.6%, while ANZ and National Australia Bank ended in the red by 0.7% and 0.9% respectively. Westpac created the headlines in the sector by announcing a $1b residential mortgage backed securities issue, an offer it certainly couldn't have even contemplated six months ago. The issue is being priced during the week but is further evidence of how far much the credit/securitisation markets have improved over the course of the year.

Elsewhere in the sector the other big story of the day was the revised bid for Axa Asia Pacific from AMP Ltd and French Insurer Axa SA with the bidding group increasing the cash component of the bid by 54c to $1.92. The revised offer now values the bid at $6.22, a 53% premium to Axa's share price before the bid was made. The offer is being referred to by AMP as "their best and final proposal" with Axa now having a week to accept the deal. AMP shares closed unchanged while Axa shares were lower by 1.7%.

Elsewhere, consumer staples names such as Wesfarmers (+1.2%) and Woolworths (+1.6%) saw strong buying interest as did JB Hi-Fi which closed higher by 2.1%. Harvey Norman gave up earlier gains to end lower by 0.2% while David Jones and Myer closed weaker by 1.4% and 1% respectively.

Prices are in AUD unless otherwise stated.
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